India growth prospects 'positive' despite rate hike: govt
India's government said Wednesday the country's economic growth outlook was "positive" despite a fresh round of monetary tightening by the central bank to tackle high inflation.
But economists said the Reserve Bank of India can be expected to continue to raise interest rates in the coming months, with inflation rates set to remain stubbornly high.
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On Tuesday the central bank raised its repo rate at which commercial banks borrow funds from the central bank to 8.5 percent from 8.0 percent with immediate effect.
It also announced a two-stage hike of the cash reserve ratio, or the amount of cash banks must hold in reserve, by 25 basis points to 8.50 percent effective July 5, and by another 25 basis points to 8.75 percent on July 19.
"These steps are necessary in the face of rising inflation due to relentless increase in crude oil prices," a finance ministry statement said on Wednesday, adding the RBI needed to "moderate and manage aggregate demand."
Inflation in Asia's third-largest economy rose to a 13-year high of 11.05 percent in the week ended June 7, well above the RBI's declared comfort level of 5.5 percent.
Price rises have overshadowed better-than-expected growth of 9.0 percent in the past fiscal year.
Economists expect growth to slow this year to around 7.8 percent on higher borrowing costs and tough global financial conditions. The prime minister has projected growth of more than eight percent.
A consensus of economists forecast average inflation for Asia's third largest economy in the nine to 10 percent range to March-end 2009.
Rupa Rege Nitsure, chief economist with state-run Bank of Baroda, said he expected another half-a-percentage point rise in the repo rate plus a 25 basis points hike in the cash reserve ratio by the end of the year.
"The second round of rising input costs is still ahead," Nitsure said.
"We are expecting the central bank to raise repo rates by 25 basis points at its next meeting," added Sonal Varma, economist with Lehman Brothers.
Goldman Sachs also said it expected "a tightening bias in monetary policy to continue."
"We think that the RBI will wait and watch inflationary trends over the next several weeks, particularly signs of pass through to broad-based inflation and broad money growth, before raising rates again," said Tushar Poddar, vice president of Asia economic research at Goldman Sachs.
"We do not think the rate hike will have a large negative impact on growth," he added, but cautioned there were "downside risks to our GDP growth forecast of 7.8 percent" for the current year.
But India's main business lobby group, the FICCI, warned businesses were feeling the pinch.
"Indian industry has been subjected to successive rate hikes over the last one and a half years. These have substantially pushed up the interest cost for industry, particularly in the face of acute international competition," it said.
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