EIU projects GDP at 7.5%: further monetary tightening

New Delhi, Aug 27 (UNI) The Economist Intelligence Unit (EIU) today foresaw a slowdown of the Indian economy pegging the figure at 7.5 per cent in 2008-09 from its earlier projection of 7.7 per cent and a further monetary tightening in view of the continuing inflationary situation.

The EIU expects the Reserve Bank of India(RBI) to remain under pressure to raise interest rates further, despite the sharp tightening of monetary policy in June and July this year.

EIU believes that in the second half of 2008 the Central Bank will increase the repo rate from 9 per cent to 9.5 per cent, and the reverse repo rate from 6 per cent to 6.5 per cent.

The RBI's more aggressive approach reflects its growing concern about the sudden acceleration in inflation to nearly 12.7 per cent earlier this month.

In the absence of other policy options, such as fiscal tightening or currency appreciation, the onus will remain squarely on monetary policy to tackle inflation. The RBI is aware of the balancing act it has to do, as reflected in its policy statement on July 29, which not only raised the Central Bank's inflation target for 2008-09 to 7 per cent from 5 to 5.5 per cent, but also lowered its economic growth forecast to 8 per cent from 8 to 8.5 per cent.

"We, however, expect the real GDP growth to noticeably moderate from 9 per cent last year to 7.5 per cent this fiscal," Mr Manoj Vohra, India Director (Research), The EIU said.

In March 2008, EIU projected the growth rate at 7.7 per cent.

The Prime Minister's Economic Advisory Council (EAC) too has accepted that India will witness slowdown in growth and revised GDP forecast to 7.7 per cent.

Mr Vohra said India's economic prospects will be undermined by higher borrowing and input costs, weaker consumer sentiment and slower external demand growth. Although the slowdown has so far been restricted to the industrial sector, it will spread to the services sector as the squeeze on costs becomes more pervasive and demand slackens.

The EIU believes that monetary easing will not occur until 2009, when it expects inflationary pressures to subside.

"We forecast two 25-basis-point cuts in the RBI's key policy rates in the second half of next year", Mr Vohra added.

The Economist Intelligence Unit is the world leader in global business intelligence. It is the business-to-business arm of The Economist Group.

The Unit provides geo-political, economic and business analysis on more than 200 countries, as well as strategic intelligence on key industries and management practices.

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