MUMBAI (MarketWatch) — The Indian economy grew at its lowest rate in more than two years in the quarter ended in September, as high interest rates and a deteriorating global environment took their toll.
The government on Wednesday said India’s gross domestic product was up 6.9% from the year-earlier quarter.
That was in line with economists’ expectations but down sharply from 7.7% growth in the previous quarter and 8.9% growth in the year-earlier quarter.
“Going forward, due to a combination of both domestic issues and worsening global prospects, we expect GDP growth to slow further,” said Rohini Malkani, an economist at Citibank.
Industrial production slowed the most during the quarter, led by a slowdown in manufacturing and also a contraction in mining, which has been hit by land-acquisition and weather-related issues, the government said.
The services side of the economy remained strong, led by the trade, hotel, transport and communication sectors.
“However, we remain wary of the prospects for these segments in the coming quarters,” said Siddhartha Sanyal at Barclays Capital. “Macro headwinds — elevated inflation, high interest rates, and a weaker global growth backdrop — remain significant obstacles to improvements in manufacturing and investment,” Sanyal said.
The latest GDP figures marked the slowest rate of expansion since the second quarter of 2009, when India and the global economy started to recover from the 2008 financial crisis, thanks to monetary and fiscal stimulus.
Since March 2010, the Reserve Bank of India began to raise interest rates to prevent the economy from overheating.
After 13 rate hikes, however, signs of a slowdown have started to appear this year, just as the global economy is beginning to falter again and the crisis in the euro zone has curbed global investments.
Last month, India’s central bank reduced its growth forecast for the year ending in March to 7.6% from 8%, citing the impact of its own monetary tightening and the weakening growth momentum in the U.S. and the euro zone.
The RBI also signaled it would pause its fight against inflation, which remained above 9% in October.
The crisis in the euro zone has also led money out of investment destinations viewed as risky, such as India and other emerging markets, contributing to an 18% slide in the rupee since July, and lifting the costs of imports, especially oil.
“I think the RBI will stick to their plan and be on hold for an extended period,” said Leif Eskesen, an economist at HSBC.
“India remains a more domestically, consumption-driven economy,” he said. The crisis in Europe and the slowdown in the U.S. do “add downside risk but we’re not there just yet to make them cut interest rates.”
Source : marketwatch.com