Indian economy to slow, say Wall Street biggies

NEW DELHI: India’s economic growth will slow after the central bank raised its benchmark lending rate to a five-year high to curb inflation, Goldman Sachs Group, HSBC Holdings and the Asian Development Bank said. Asia’s fourth-largest economy will grow 8% in the year ending March 31, ADB chief economist Ifzal Ali and Goldman economists Tushar Poddar and Mark Tan said. HSBC economist Robert Prior-Wandesforde expects 7.8%. India’s economy grew 9.2% in the previous year, the government estimates.

PM Manmohan Singh wants to tame inflation at the earliest to win voter support in a key state poll this week, after losing two provincial elections in February. The Reserve Bank of India have been raising banks’ reserve requirements and interest rates to slow record loan growth and curb inflation from a two-year high.

“The risks to our projections are now skewed to the downside due to the aggressive tightening,” Goldman’s Poddar and Tan said in a note to clients. “Given the political pressures on the central bank and the long lags associated with policy, we see another 25 to 50 basis point increase in rates before they stabilise.”

Congress party blamed inflation for state election losses last month. The party faces polls again on April 7 in the Uttar Pradesh. The election will be staggered over a month and will set the tone for general elections in about two years time. India’s benchmark wholesale inflation rate stood at 6.47% in the week ended March 17, and may exceed the central bank’s inflation forecast of between 5% and 5.5% by March 31.

With inflation a percentage point above the central bank’s forecast, RBI governor Y V Reddy on March 30 unexpectedly raised the cash reserve ratio, or the amount of cash lenders must set aside against deposits, for the third time since December, along with an increase in the key overnight lending rate. In response, most banks increased their lending rates by between 200 basis points and 250 basis points in the past four months.