Inflation, rupee hardening, RBI interventions may dampen GDP growth

New Delhi, Apr 15 (UNI) Inflation, falling demand as a consequence to spiraling interest rates, appreciating rupee and significant supply shortages in the global and Indian economy may restrict the country's GDP growth in the current year to 8.5 per cent. The elements in the economy, which have started surfacing towards the latter part of the fiscal 2006-07 are likely to play a moderating role on the growth prospects of the economy, according to industry body CII.

However, the chamber believes that agriculture is expected to improve its growth performance from 2.7 per cent to three per cent, mainly owing to low base of last year and deliberate attempts to increase production of primary articles in response to high prices.

The strongest factor contributing to growth moderation is going to be the result of repeated monetary interventions being made by the RBI to reign in inflation, CII said.

These across-the-board rate hikes yield results into a lag and therefore, the chamber stated that the effects would be felt well in the new fiscal.

The current inflation is the result of mainly supply side shortages and hence a modestly tight monetary environment is what should be in place, it said.

There are already signals of demand slowdowns in sectors like automotive, retail banking, etc, as a result of the rate squeeze.

With significant demand compression being resorted to, the growth of industry and services are likely to suffer slowdowns to 9.3 per cent and 9.9 per cent in the current year compared with the corresponding values of 10 per cent and 11.2 per cent last year.

Part of the growth moderation would also be owing to the strengthening rupee which is likely to slowdown exports, which had been a driver for the last few years, a CII statement said.

UNI