India’s growth momentum to stay strong in 2010/11


Reuters | Wed Jul 14, 2010 | 7:49pm IST

India’s economic growth is expected to accelerate in fiscal 2010/11, supported by a double-digit rise in industrial output and robust domestic demand, a Reuters survey shows. The survey of 21 economists showed Asia’s third-biggest economy would grow 8.4 percent from a year earlier in the 12 months to the end of March 2011 and 8.5 percent in 2011/12. The economy had expanded 7.4 percent in 2009/10. The growth momentum should keep inflation pressures strong and lead to a tighter monetary policy in the coming months.

The Reserve Bank of India (RBI) has raised its short-term lending rate by a total of 75 basis points in 2010 to 5.5 percent. "The RBI is raising rates because it is seeing demand pressures in the economy due to higher growth," said Dharmakirti Joshi, chief economist at credit rating agency CRISIL. "There will be a gradual increase in interest rates. That’s the stance of the RBI and they will continue with it." A similar poll in April had forecast growth of 8.4 percent in 2010/11 and 8.6 percent in 2011/12. 

DOUBLE-DIGIT INFLATION

The poll shows that price pressures would remain strong this year, but moderate next year as the RBI’s expected rate increases begin to take effect and good monsoon rains improve the prospects for farm output. The wholesale price inflation is forecast at a median 8.6 percent for 2010/11 and moderate to 5.5 percent in the following year, the poll showed. This compares with 7 percent and 6 percent respectively in the previous poll. Annual inflation in June was at 10.55 percent, slower than analysts’ expectations, driven by high food and fuel prices, data showed on Wednesday. The figure compared with market expectations for a 10.8 percent rise and was higher than May’s annual rise of 10.16 percent

The poll also showed that the RBI would raise the repo rate, at which it lends to banks, by another 50 basis points to 6 percent by the end of December and possibly peak at 6.5 percent by next June. In early July, the RBI raised the repo and reverse repo rate, at which it absorbs excess cash, by 25 basis points each and a survey after the rate increases showed the bank is likely to raise rates again at its review on July 27. The rupee is forecast to appreciate about 3 percent between now and the end of December. It is marginally weaker so far in 2010 after having climbed 4.7 percent in 2009.

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