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India Forecasts Lowest Growth in Decade, Sees Rate-Cut Scope

India Forecasts Lowest Growth in Decade, Sees Scope for Rate Cut
Construction for a new Rapid MetroRail Gurgaon Ltd. station stands in Gurgaon, India. Photographer: Brent Lewin/Bloomberg

Dec. 17 (Bloomberg) -- India’s economy will grow at the slowest pace in a decade in the current fiscal year, according to forecasts by the Finance Ministry, which predicts inflation will slow enough to allow interest-rate cuts.

Asia’s third-largest economy will expand about 5.7 percent to 5.9 percent in the year through March, less than an earlier estimate of as much as 7.85 percent, the ministry said in a mid-year review presented in Parliament today. That would be the smallest gain since the year ended March 31, 2003, when gross domestic product grew 4 percent.

The Reserve Bank of India, which decides on monetary policy tomorrow, has so far resisted calls from Finance Minister Palaniappan Chidambaram for lower rates, opting to keep the repurchase rate at 8 percent to damp inflation in October while reducing the cash reserve ratio. Stocks fell after the government cut its growth forecast, paring gains made in recent weeks as India stepped up efforts to push through a policy overhaul and attract foreign investors.

“There is no doubt left that India is faced with a serious economic situation,” said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi. “The central bank might take the recent government measures more seriously and try to provide a more investor-friendly environment.”

Stocks Fall

The BSE India Sensitive Index fell 0.4 percent, while the rupee declined 0.7 percent to 54.8550 per dollar, the lowest in two weeks. The yield on the 8.15 percent Indian government bond due June 2022 was little changed at 8.14 percent.

To revive confidence in an economy with one of Asia’s worst performing currencies this year, Prime Minister Manmohan Singh in recent months allowed more foreign investment in retail, curbed energy subsidies and set up a panel to accelerate infrastructure projects. He also approved changes to a century-old land law to help curb often violent protests that have stalled projects.

“We cannot be satisfied with this rate of growth,” Raghuram Rajan, chief economic adviser in the ministry of finance, told reporters in New Delhi today. The government will take more steps to boost growth, including “a good confidence-inducing budget, speeding up clearance for the projects through the new cabinet committee and further steps in capital market reforms.”

Inflation Estimate

The Reserve Bank of India on Oct. 30 cut its projection for economic growth to 5.8 percent from 6.5 percent and raised its inflation forecast to 7.5 percent by March 2013 from 7 percent. The International Monetary Fund on Oct. 9 predicted GDP will climb 4.9 percent in 2012, the least in a decade.

“Both fiscal and monetary policies, however, would need to be supportive to sustain investor confidence,” the Finance Ministry said today. A moderation in inflation that may commence in the January-to-March quarter and benign global commodity prices will “facilitate softening of the monetary policy stance of the RBI,” it said.

Inflation at the end of March will probably moderate to 6.8 to 7 percent and the budget deficit will be contained at 5.3 percent of GDP, the Finance Ministry said.

The central bank may keep its benchmark interest rate unchanged tomorrow, while reducing the reserve ratio for lenders, according to most economists surveyed by Bloomberg News.

“The growth revision was expected and the central bank may like to see one or two more data points before loosening policy,” said Kaushik Dani, a fund manager who helps manage $886 million in assets at Peerless Mutual Fund in Mumbai.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Abhijit Roy Chowdhury in New Delhi at achowdhury11@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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