Moody’s expects tightening of India’s monetary policy

June 3rd, 2008 - 5:38 pm ICT by IANS  

New Delhi, June 3 (IANS) Terming price rise as a threat to social stability in India, a noted global rating agency feels the country’s central bank may take further steps to tighten money supply and bring the inflation down. “Given that the Indian economy still appears healthy, the Reserve Bank of India may consider further tightening to cool inflation, which is a threat to social stability,” said the report by Moody’s Economy.

The agency also noted in its assessment of India’s foreign trade that the consumer sector was showing few signs of fatigue, with the services sector being the main engine for expansion in the March quarter.

According to Moody’s, the complaints by exporters on negative impact of rupee appreciation did not hold ground but challenges did remain for India’s external sector in the form of demand slowdown in rich nations.

“Export slowdown is showing absolutely no signs of slowdown, despite earlier complaints about the negative impact of a stronger currency,” the rating agency said in a study on India’s foreign trade.

“Considering that the rupee has recently retreated, the prime competitiveness of India’s exports will stop declining. The biggest risk to India’s export outlook is now purely weakness in external demand,” the rating agency added.

“Softening consumption in developed nations such as the US will certainly hurt India’s outbound shipments.”

The study came against the backdrop of India’s merchandise exports missing the target of $160 billion for the last fiscal by $5 billion, but still managing to log a growth of over 30 percent in the first month of the current fiscal.

The study, by Sherman Chan, Moody’s economist for India, Hong Kong, Singapore and Vietnam, said the emerging South Asian economic giant was expected to look increasingly at intra-regional opportunities to sustain its export revenues.

Looking at the other side of the trade ledger, Moody’s said imports were also growing strong in India and that the country’s tight monetary policy did not appear to have weighed on the demand for imports.

“As shown in the March quarter gross domestic product (GDP) data, construction activity has remained strong in India and this will see demand for overseas resources stay firm in near term,” the agency said.

The Indian economy expanded by 8.8 percent in the quarter ended March 31 to log a 9 percent growth for 2007-08, but industrial production rose just 3 percent in February - a notable slowdown from the 8.6 percent a month before.

The price rise has also become cause for worry with the annual rate of inflation based on wholesale prices shooting up to 8.1 percent for the week ended May 17, against 7.82 percent for the week before.

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