Mumbai: India is expected to confirm on Thursday that its economy expanded at a record 9.2% in the past financial year despite tighter monetary policy by the central bank to cool inflation, analysts say.
Analysts predict the nation could even show a gain as high as 9.4% for the year ended March as companies continued high production, more work was outsourced to India and farmers recovered from poor rains a year earlier.
“Strong industry and services has aided growth. Farm production possibly was also relatively strong,” said Manika Premsingh, an economist with brokerage Edelweiss Capital.
The government’s own forecast of 9.2% was matched by several think tanks including the New Delhi-based National Council of Applied Economic Research and the country’s central bank.
But there has been concern that a series of monetary tightening measures by the Reserve Bank of India, which raised short-term lending rates twice in 2007 to 7.75 percent -- the highest in more than four years -- would act as a brake.
The central bank moves were aimed at slowing demand for goods such as cement, steel and basic food items that have soared as consumers spend on cars, houses and other goods.
Premsingh however said that because industrial growth has already been reported up 11.3% for the year, up from 8.2% a year ago, enough data is available to show the economy remains on track despite the rate hikes.
“With stronger than expected industrial production trends, we can look forward to robust GDP as well,” Premsingh said.
Investment in India’s stock market has also shown no sign of dipping.
In the first five months of 2007, overseas funds pumped in $3.79 billion , on track to match last year’s record $10.7 billion.
The benchmark 30-share Sensitive Index has risen four percent this year and closed at 14,338.45 points on Friday, near its all-time record high.
Analysts however expect economic growth to taper off in coming quarters to levels slightly above eight percent for the fiscal year ending March 2008, or lower than the central bank’s estimate of 8.5%.
“J P Morgan forecasts GDP growth of eight percent for 2007-08,” said Rajeev Malik, a Singapore-based Asia economist with J P Morgan Chase Bank.
“Export growth is also expected to moderate due to softer external demand,” he added.
Indian services and goods are also becoming more expensive and hitting the trade balance as tight monetary policy helped the rupee hit a near decade high against the dollar of 40.50 this year.
But the stronger rupee is also helping curb prices by lowering import costs and this could push inflation down further, Edelweiss’s Premsingh said.
“We expect inflation to fall below five percent before the first quarter ends (in June),” Premsingh said.
But other analysts say the central bank may not halt its tightening cycle because of continued strong cash flows from overseas and may ask banks to set aside higher cash reserves -- a policy that is aimed at reducing money available for loans.
“A cash reserve hike is in the offing, though key rates could remain unchanged,” said Bidisha Ganguly, chief economist with brokerage BRICS Securities.
The central bank now requires commercial banks to hold 6.50% of all funds in cash, mainly government securities, almost double the level from three years ago.