Indian economy to slow after RBI rate hikes: Moody’s

June 25th, 2008 - 5:41 pm ICT by IANS  

New Delhi, June 25 (IANS) India’s growth rate will moderate to 7.6 percent during the current fiscal from nine percent a year ago due to deflationary measures of the central bank, global rating agency Moody’s said Wednesday. “Tighter monetary policy settings will slow India’s economy,” Moody’s Economy said a day after the Reserve Bank of India (RBI) hiked the short-term interest rate and the minimum cash balance for commercial banks by 50 basis points.

“This is yet another signal that the RBI is ready to act and also be aggressive in tightening monetary policy. The RBI has also likely intervened earlier this week to boost the rupee in order to control imported inflation,” it said.

“As domestic demand cools under higher interest rates and slower lending growth, inflationary pressures will begin to ease in coming months,” the ratings agency added.

The agency also predicted a status quo in rates for a month or so.

“Having already implemented two interest rate hikes in between scheduled meetings and because it takes time to realise the impact of recent actions, the central bank is now expected to sit pat until the July monetary policy review.”

Commenting on inflation, the agency said the recent fuel price hike thought to have added about 100 basis points to inflation, but the jump to over 11 percent was likely due in part to over-adjustments in prices by producers.

“Moody’s Economy forecasts wholesale price index growth will return to single digits in the second half of the year.”

The agency said fuel price hikes may not be a popular move, but it was necessary since global oil prices had skyrocketed. Keeping domestic fuel prices unchanged would have seen oil refiners running losses.

“If the government is keen to help struggling households, it will likely target its policies to such groups instead of a blanket approach such as fuel subsidies that benefits everyone including businesses that are financially strong.”

Yet, the agency added, further increases to fuel prices were unlikely in coming months unless the government faces massive financial pressures to support state-run oil companies.

“The current inflation situation is already alarming and the government will not want to do further damage to their image in the lead-up to the election.”

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