Goldman's new India index suggests more rate rises

SINGAPORE, Apr 13 (Reuters) Indian financial conditions are still loose in a historical context and more rate rises may be warranted to rein in the booming economy, Goldman Sachs said on Friday, citing findings from a new financial conditions index.

Goldman analysts Tushar Poddar and Mark Tan said in a report its new financial conditions index (FCI) for India incorporates interest rates, money supply, exchange rates and stock markets as important transmission channels of money policy.

Financial conditions in India remained loose until mid-2006, taking the FCI from 100 in 1999 to a trough of 94 in April 2006, they said. Since then it has tightened, with the index increasing by about 120 basis points.

Since early December, the central bank has raised the reserve requirements for banks three times and increased its main short-term lending rate twice to 7.75 percent to cool demand and tame inflation.

''Rising interest rates and an appreciating rupee have contributed the most to increasing the FCI, while continued growth in M3 and the run-up in the stock market have restrained the amount of tightening.

''The FCI suggests that even after the current spate of rate increases, financial conditions remain supportive of growth, and thus concerns of a hard landing are overdone,'' Goldman wrote.

It said interest rates would have to rise by 50 basis points and broad money growth would have to moderate for the economy to slow to a trend growth rate of 8 percent.

The economy is expected to have expanded at more than 9 percent in the financial year that ended in March 2007.

REUTERS SBA DS1520