India’s Growth Rate Expected to dip Below 7%.

MUMBAI (MarketWatch) — India’s growth is forecast to have slowed in the three months ended in September, slipping below 7% for the first time in more than two years and adding pressure on the central bank to end its 18-month-long campaign to fight inflation.

“The downside risks to growth are rising very fast,” says D.K. Joshi, chief economist at the ratings firm CRISIL in Mumbai.

India’s gross-domestic-product figures, due to be released Wednesday, are expected to show growth of 6.9% from the year-earlier quarter, according to the average forecast of economists polled by Dow Jones Newswires. That’s down sharply from 7.7% growth in the previous quarter and 8.9% growth in the year-earlier quarter.

The Reserve Bank of India has hiked interest rates 13 times since March 2010 to curb excess demand and stem inflation, which remains above 9%. But other factors, namely the crisis in Europe and slower growth in the U.S., are now also fueling investment uncertainty and curbing demand for Indian-made goods.

“We’d had good growth in exports, but now that’s slowing down,” Joshi said.

Growth in the services sector, forecast at 9% year-on-year, remains the main factor supporting growth, along with agriculture, where growth of 2.6% is expected, according to Religare Capital Markets.

Most of the slowdown is expected to come from industrial production, where growth fell more than expected in September, led by lower manufacturing and electricity production, as well as mining, which has also been hit by land acquisition and weather-related issues.

Growth in durable consumer goods, such as televisions, did, however, get a bounce for India’s Diwali festival in late October, according to HSBC.

But there was a plunge in the sales and production of cars in October, partly due to a strike at Maruti Suzuki Ltd., and as consumers reacted to rising fuel costs.

“The high levels of inflation over the last couple of years and subsequent hike in the interest rates are likely to have taken their toll on domestic consumption and investments, more so on the latter,” said Jay Shankar, chief economist at Religare.

In October, India’s central bank lowered its growth forecast for the year ending in March to 7.6% from 8%, citing the impact of monetary tightening and the weakening growth momentum in the U.S. and the euro zone.

The RBI also signaled a pause in monetary tightening was likely at its December meeting.

But wholesale inflation came in at a higher-than-expected 9.7% in October, with the 18% slide in the rupee since July sharply raising costs for India’s imports, especially oil. “The exchange rate is making imports expensive,” said CRISIL’s Joshi. “So it’s balancing out the impact on inflation from slowing growth.

“But I believe the demand-side pressures will subside, and food inflation has also shown positive signs,” he said. “So [the RBI] will definitely be on pause and wait to see what happens.”

Other central banks in Asia have already either paused their monetary-policy tightening or begun cutting interest rates.

On Monday, Morgan Stanley lowered its growth forecast for the whole of Asia for this year and next, citing risks to growth from Europe and the U.S.

Source : marketwatch.com