Is the Party Over For Indian Economy

Monday, April 14, 2008 | | |

The going has been good in India in the last three years.
GDP growth has averaged more than 9%, creating millions of jobs and billions of dollars in investments.

However, the rise in inflation together with high interest rates and a potential global recession threaten to halt the Indian party this year.

Already economists are predicting a slowdown in GDP growth in 2008-09, as higher inflation is likely to force the Reserve Bank of India to hike interest rates, which will impact borrowing both for consumers and companies.

Wholesale prices shot up to 7.41% in the week ended March 28 from just 3.80% on January 12. It is also beyond RBI’s self-imposed target of 5-5.50%.

The higher inflation has dashed all hopes of lower interest rates. Growth is also likely to be relatively lower than the previous years.

Dharmakirti Joshi, principal economist at rating agency Crisil, sees inflation dominating all macroeconomic calculations in 2008-09.

“Inflation is now out of the comfort zone and is beginning to hurt. There is no way interest rates are going to come down soon unless inflation declines and stays below 5% for some time,” Joshi said.

Higher inflation is likely to force the RBI to hike the cash reserve ratio (CRR) — or the portion of deposits that the banks have to compulsorily park with the RBI as a safety measure — when its holds its annual monetary policy meeting on April 29. The CRR is currently at 7.75%.

Economists such as Sonal Varma and Rob Subbaraman of Lehman Brothers, who had previously expected the RBI to cut rates in by the end of 2008, are now not expecting any rate cut this year because inflation has risen faster than they had forecast.
HDFC Bank chief economist Abheek Barua expects higher interest rates in the short term