New Delhi: India’s slowing economic growth is a “cause for worry”, research group Moody’s Analytics said Monday, highlighting the failure of aggressive interest rate hikes to curb near double-digit inflation.
India’s growth has weakened under the brunt of 12 interest rate increases since March 2010 that have pushed up borrowing costs for everything from consumer appliances to plant equipment.
India’s growth would slow from an expected 7.8% year-on-year in the first half of 2011 to 6.5% by mid-2012, said Glenn Levine, senior economist at Moody’s Analytics.
That still implied a “soft landing” — a rate of growth high enough to avoid recession — Levine said in a research note, while warning that this outcome was “by no means assured”.
Although the economy of neighbouring emerging market China was also slowing, it was happening “at an entirely manageable rate”, Levine said.
“India presents a more serious cause for worry” as its economy “is slowing sharply,” he said.
With inflation remaining stubbornly high at 9.72% in September, India’s central bank may be forced into further monetary tightening in the months ahead which would exacerbate the slowdown, Levine said.
Many economists expect another 25-basis point rate hike later this month, pushing India’s benchmark lending rate to around a three-year peak of 8.50%.
“So far, the Reserve Bank of India’s 325 basis points’ worth of tightening must be judged a failure” while domestic demand has been hit hard, Levine added.
The faltering US economy and eurozone debt crisis are beginning to curb growth in Asia, prompting many central banks in the region to shift focus from fighting inflation to promoting growth.
Indonesia, whose central bank was the first in the region to loosen monetary policy in the region in response to the latest global financial crisis, is “still in good shape,” Levine said.
Singapore, among the most open, trade-dependent economies in Asia, and whose growth path is a bellwether for the region, has shown a rebound in economic expansion, he noted.
China’s economy should help keep growth in the Asia-Pacific region on a solid footing, Levine said.
“But if China and India, the region’s two emerging giants, were to slow more than expected, much of the region could be pushed into recession,” he said.
Australia “offers the clearest example” of vulnerability with growth driven by booming mining and its strong links to Chinese commodity demand, while the rest of the economy is still struggling, he said.
“A fall in commodity demand linked to slowdowns in China and India would be enough to knock Australia’s patchy recovery off track,” Levine said.
South Korea also relies heavily on China’s demand for plant equipment and other machinery.
Its growth should continue at a “decent, though not outstanding clip,” he forecast, but there are “growing downside risks” from any collapse in export demand.