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Prospects of rate hike to slow down India's growth: Moody's

business Updated: Aug 07, 2011 10:52 IST

Research firm Moody's has said that prospects of further rate hikes by the Reserve Bank of India is likely to slow down the growth of Indian economy in 2011-12.

It, however, added that headline inflation in the country is expected to remain at around 9% in the coming months.

"With Indian policymakers signalling additional interest rate hikes are needed to cool inflation, growth will slow through the end of the year," Moody's Analytics said in an article Higher Rates Slow Indian Growth.

The research firm had earlier forecast the Indian economy to grow by 8.2% in 2011-12, compared to previous fiscal's 8.5%.

"The Prime Minister's Economic Advisory Council revised its Indian growth forecast down to 8.2%... and is now in line with our 8.2% estimate," it said.

In its Economic Outlook for 2011-12 released last week, the PMEAC projected growth to slow down to 8.2%, far below the government's pre-Budget survey expectation of 9%.

In its annual monetary policy review, the RBI had also painted a gloomy picture and said that Indian economy would expand by only 8% this fiscal.

The RBI has already hiked interest rates 11 times since March, 2010 to curb inflation. Headline inflation stood at 9.44% in June.

"Tighter monetary policy is working to cool domestic demand. Manufacturing grew at the slowest pace in 20 months in July...," Moody's Analytics said.

It added, "Even though policymakers are engineering slower growth, the country's robust expansion remains firmly on track, and no hard-landing is expected".

Moody's, however, cautioned against spiralling inflation and said rising prices remain the prime risk India's robust medium-term growth projections.

"Inflation remains stubbornly strong, despite the central bank's aggressive monetary tightening over the past year... Inflation will sustain its current 9% pace in coming months, before tighter monetary policy and rising agricultural production reduce food and demand-side inflation by year's end," Moody's Analytics said.

The PMEAC's outlook had also projected inflation to remain stubborn till at least October, mainly on account of high global commodity prices.