DBS ups India’s FY10 growth forecast to 6.8%

DBS ups India’s FY10 growth forecast to 6.8%

Mumbai: The Indian economy may grow at 6.8% in 2009-10, higher than an earlier forecast of 6.5%, driven by strong manufacturing growth, DBS said in a note on Monday.

Manufacturing production rose 12.7% in November from a rise of 2.7% a year earlier, the government said last week.

Industrial output grew at its fastest pace in two years in November, strengthening the case for the central bank to tighten policy to temper inflation expectations.

“Stronger-than-expected manufacturing growth is the main reason for the upward revision," Ramya Suryanarayanan, economist at DBS Singapore, wrote in the report.

However, the manufacturing growth was largely an outcome of low interest rates and pent-up demand, she said in the note, adding that sustainability of the sector’s growth in calendar year 2010 is a concern.

“Already manufacturing has begun to moderate. It has not moderated as much as I thought," Suryanarayanan said over the telephone to a query on why the bank revised GDP growth even as it sounded concerns about the sector’s prospects in 2010.

DBS also revised its 2010-11 growth forecast for to 7.9% from 7.5% earlier.

The note also said that chief risks to growth in 2010-11 comes from monetary tightening that would be needed to control the price rise.

Indian inflation jumped to a one-year high in December, reinforcing views the central bank will start increasing reserve requirements later this month to contain price pressures as the economic recovery strengthens.

DBS expects a 200 basis points of rate hikes in January-December 2010 and 150 basis points of cash reserve ratio hikes.