Mumbai: India’s economy is seen growing at a faster pace in 2010-11 than earlier expected, supported by a global recovery, domestic demand and a double-digit expansion in factory output, a Reuters poll shows.
Such expansion will generate greater inflation than previously expected, requiring a steady series of rate rises from the Reserve Bank of India (RBI) by the end of December.
Asia’s third-biggest economy will grow at annual rates above 8% in coming quarters and is seen expanding 8.4% for the 2010-11 fiscal year, the survey of 20 analysts showed.
A similar quarterly poll in January had forecast growth of 8%.
The poll showed that growth would accelerate in the fiscal year 2011-12 to 8.6%.
“A good pick-up in growth will depend upon good private demand and investment demand. Two factors sustaining growth in FY11 will be a normal monsoon and the level of global crude prices in the band of $70 to $80 a barrel,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
“Growth will gradually build up because real sector adjustment takes time,” he added.
India’s economy grew 6.7% in 2008-09, slowing from rates of 9% or more in the previous three years. The government has said it expects growth in 2009-10, or the fiscal year that ended on 31 March, to have been 7.2%.
Analysts expect the RBI to tighten policy further, raising the repo rate, at which the central bank lends to banks, by 100 basis points to 6.0% by the end of December from the current 5%.
Last month, the RBI raised the repo rate and the reverse repo rate, at which it absorbs excess cash from the banking system, by 25 basis points each. That took the reverse repo rate to 3.5%.
The rises were the first since the RBI began cutting rates in 2008. The central bank cited inflationary pressures and a steady economic recovery for the move.
Fifteen out of 16 economists surveyed said the central bank would raise the repo rate between 25 and 50 basis points by the end of June.
All 16 expect the central bank to raise the repo rate by the end of December between 25 basis points and 125 basis points.
“What the RBI seems to be doing is following a gentle trajectory,” said Abheek Barua, chief economist with HDFC Bank.
“It will follow a calibrated approach and avoid coming across as aggressive when most other central banks are in a wait-and-watch mode,” he added.
“Besides inflation, there are other concerns like bond yields, growth and government borrowing the RBI has to balance,” Barua said.
Inflationary Pressures Strong
Economists expect inflationary pressures to remain strong in 2010-11 on high food prices, but they could abate by March 2011, the survey showed.
The wholesale price index in February was 9.89% higher than a year earlier, marking the strongest inflation since October 2008.
The full-year average for wholesale price inflation is forecast at 7% in 2010-11, easing to 6% in 2011-12, the survey showed.
In the previous poll, analysts had forecast 2010-11 wholesale price inflation at 5.8%.
The rupee, which closed around 44.48 per dollar on Tuesday, is forecast to appreciate about 1.2% between now and end of December. It has already gained 4.7% so far this year.