The good news is that India’s GDP growth is expected to remain strong in the current year despite an interest rate crunch that makes loans costlier. But the Reserve Bank of India (RBI) signalled on Tuesday that the pinch this year could tell on growth next year.
Raising its policy repo rate and the reverse repo rates by 25 basis points (0.25 percentage points) each to contain inflation, the RBI, in a mid-term monetary policy review, projected a GDP growth rate of 8.5 per cent for 2010-11 but saw a slowdown in the next fiscal year."Growth next year will moderate. It may be because of some mathematical reasons but its also because of supply constraints," RBI governor Duvvuri Subbaarao said, noting the current slump in industrial growth was a pointer to uncertainties.
RBI said the current year’s growth rate could even exceed 8.5% and the risks were only on the “upside.”
“With high commodity prices and high interest rates, growth will slow down as Indian companies are consumers of commodities. If earnings growth were projected between 20-25% for financial year 2011-12, it is more likely they will fall to 15 to 18%,” said Aseem Dhru, CEO, HDFC Securities.
By extending a liquidity adjustment facility, the central bank eased up liquidity support to help banks lend more to businesses, while tightening rates.
However, this does not mean higher credit growth that could fuel demand and push inflation out of control.
“It is important that credit growth moderates to conform broadly to the indicative projection. This will prevent a build-up of demand side pressures,” an RBI statement said.
The RBI signalled it will keep the pressure on banks that show an abnormal rise in credit-deposit ratios – which could indicate imprudent lending.