Interest rate cut looms as Indian economy's slowdown goes deeper

New Delhi: India's economy may slow more than previously estimated, the central bank said in a report, increasing expectations of further cuts in interest rates to encourage investment and consumption.

The economy may expand 7.7 per cent in the year ending March 31, according to the median estimates of 13 research groups in September, the bank said.

That's less than the 7.9 per cent estimate in June, the Reserve Bank of India said in a report on the economy issued in Mumbai, before its quarterly monetary policy announcement today at 11.15 am.

Governor Duvvuri Subbarao this week unexpectedly cut the central bank's key repurchase rate by 100 basis points to 8 per cent after pumping Rs1 trillion ($20 billion) into the financial system since October 11 by reducing lenders' reserve requirements. Subbarao can afford to ease borrowing costs as inflation risks have receded with the drop in commodity prices.

"Slowdown risks have heightened," said Mridul Saggar, chief economist at Kotak Securities Ltd. in Mumbai. "The Reserve Bank is right in changing its stance toward supporting growth, which is clearly faltering."

The results of a survey of professional forecasters' conducted by the Reserve Bank last month suggest "further moderation in economic activity for 2008-09" the bank said, without elaborating on the reasons for the slowdown.

Inflation

India's key wholesale price inflation slowed to a four-month low of 11.07 per cent in the week to October 11. Crude oil prices have halved since their peak in July and the Reuters/Jefferies CRB Index of 19 commodities fell 18 per cent this month.

Prime Minister Manmohan Singh asked the nation this week to be prepared for a "temporary slowdown." India's $1.2 trillion economy grew a record average 8.9 per cent since he became premier in 2004.

India's benchmark Sensitive index fell 3.9 per cent to 9,771.70 yesterday, extending a 51 per cent decline since January. The yield on the key 10-year government bonds fell 5 basis points to 7.55 per cent, while the rupee dropped 1.1 per cent to 49.825 a dollar, an all-time low.

The decline in demand is already showing in India. The economy grew 7.9 per cent in the three months to June 30 from a year earlier, the weakest pace since the last quarter of 2004. Output at factories, utilities and mines rose 1.3 per cent in August from a year earlier after a 7.4 per cent gain in July.