The going has been good in India in the last three years.
GDP growth has averaged more than 9%, creating millions of jobs and billions of dollars in investments.
However, the rise in inflation together with high interest rates and a potential global recession threaten to halt the Indian party this year.
Already economists are predicting a slowdown in GDP growth in 2008-09, as higher inflation is likely to force the Reserve Bank of India to hike interest rates, which will impact borrowing both for consumers and companies.
Wholesale prices shot up to 7.41% in the week ended March 28 from just 3.80% on January 12. It is also beyond RBI's self-imposed target of 5-5.50%.
The higher inflation has dashed all hopes of lower interest rates. Growth is also likely to be relatively lower than the previous years.
Dharmakirti Joshi, principal economist at rating agency Crisil, sees inflation dominating all macroeconomic calculations in 2008-09.
"Inflation is now out of the comfort zone and is beginning to hurt. There is no way interest rates are going to come down soon unless inflation declines and stays below 5% for some time," Joshi said.
Higher inflation is likely to force the RBI to hike the cash reserve ratio (CRR) — or the portion of deposits that the banks have to compulsorily park with the RBI as a safety measure — when its holds its annual monetary policy meeting on April 29. The CRR is currently at 7.75%.
Economists such as Sonal Varma and Rob Subbaraman of Lehman Brothers, who had previously expected the RBI to cut rates in by the end of 2008, are now not expecting any rate cut this year because inflation has risen faster than they had forecast.
HDFC Bank chief economist Abheek Barua expects higher interest rates in the short term.
"The RBI governor has been somewhat more hawkish than usual in the statements after the inflation data release and we expect the central bank to follow through with monetary action. The RBI could choose to excise some of this liquidity through a 50 bps (0.50%) increase in CRR," Barua wrote in a note released on Tuesday.
Higher interest rates and increasing expenses would directly mean that demand for goods and services would lessen, which could put pressure on economic growth.
The Indian economy grew by 9.4% in 2005-06 and 9.6% in '06-07. But growth is expected to be 8.7% in '07-08 courtesy interest rate hikes by the RBI.
In 2008-09, growth is likely to slow down further as high borrowing rates are likely to choke consumers and investments. And this time there will also be the rising prices to deal with.
Growth forecasts for 2008-09 are quite divergent: HSBC India economist Robert Prior-Wandesforde predicts 7% while HDFC's Barua pegs it at an optimistic 8-8.5%.
Wandesforde says higher interest rates, a stronger currency, and weaker global growth, has impacted on economic growth and will continue to do so this year.
Barua is banking on a strong pace of infrastructure development and expectations that retail lending rates are unlikely to go much higher from current levels.
Lehman's Varma and Subbaraman have predicted that measures to curb inflation will come at the cost of GDP growth.
"Growth is already facing headwinds from weakening foreign demand and tight monetary conditions. As a result, we have cut our GDP growth forecast for FY09 (Apr-08 to Mar-09) from 8.3% y-o-y to 7.6%, which is well down from 8.7% in FY08," they wrote in a note on April 11.
Besides, slowing global growth will also pull growth down. The International Monetary Fund (IMF) has predicted a 0.50% drop in global growth to 3.7% this year because of a mild recession in the US. India's growth projection has also been cut to 7.9%.
Slower growth is a consensus among economists. But which sectors will be hit the hardest? Crisil's Joshi says the sectors, which are already reeling under higher rates may feel the pinch. "Sectors like consumer loans, real estate and auto will feel the pinch.
However, some other sectors like pharmaceuticals, food and beverages and consumer non-durables may just not be impacted that much," Joshi said.
Loan growth has been hit in the banking sector as interest rates for housing, cars, and consumer durables have gone out of the reach of consumers. This in turn has had a ripple effect on the real estate and auto sectors.
Lower demand for houses means home prices have fallen but the middle class still can't afford them because of high interest rates.
Barua points out that lower growth is also impacting investment demand together with consumption and export sectors.
"Some of the expansion plans for companies are being put on hold because of the sluggish IPO market. The problems of some of the export-oriented sectors -- textiles and auto components -- are feeding through to other sectors. There appears to be a compression in sectors like textile machinery and machine tools," Barua wrote in HDFC's newsletter Ecotalk.
However, commodity segments like petroleum products, primary commodity exports and metal exports are expected to make strong gains thanks to record oil and metal prices.
Barua sees a "continued momentum" in infrastructure segments such as roads, ports, airports, urban infrastructure, telecom where either the government is a major partner (the Bharat Nirman programme for instance) or where there is sufficient clarity in the regulatory regime to sustain private sector interest (ports , telecom).
GDP growth has averaged more than 9%, creating millions of jobs and billions of dollars in investments.
However, the rise in inflation together with high interest rates and a potential global recession threaten to halt the Indian party this year.
Already economists are predicting a slowdown in GDP growth in 2008-09, as higher inflation is likely to force the Reserve Bank of India to hike interest rates, which will impact borrowing both for consumers and companies.
Wholesale prices shot up to 7.41% in the week ended March 28 from just 3.80% on January 12. It is also beyond RBI's self-imposed target of 5-5.50%.
The higher inflation has dashed all hopes of lower interest rates. Growth is also likely to be relatively lower than the previous years.
Dharmakirti Joshi, principal economist at rating agency Crisil, sees inflation dominating all macroeconomic calculations in 2008-09.
"Inflation is now out of the comfort zone and is beginning to hurt. There is no way interest rates are going to come down soon unless inflation declines and stays below 5% for some time," Joshi said.
Higher inflation is likely to force the RBI to hike the cash reserve ratio (CRR) — or the portion of deposits that the banks have to compulsorily park with the RBI as a safety measure — when its holds its annual monetary policy meeting on April 29. The CRR is currently at 7.75%.
Economists such as Sonal Varma and Rob Subbaraman of Lehman Brothers, who had previously expected the RBI to cut rates in by the end of 2008, are now not expecting any rate cut this year because inflation has risen faster than they had forecast.
HDFC Bank chief economist Abheek Barua expects higher interest rates in the short term.
"The RBI governor has been somewhat more hawkish than usual in the statements after the inflation data release and we expect the central bank to follow through with monetary action. The RBI could choose to excise some of this liquidity through a 50 bps (0.50%) increase in CRR," Barua wrote in a note released on Tuesday.
Higher interest rates and increasing expenses would directly mean that demand for goods and services would lessen, which could put pressure on economic growth.
The Indian economy grew by 9.4% in 2005-06 and 9.6% in '06-07. But growth is expected to be 8.7% in '07-08 courtesy interest rate hikes by the RBI.
In 2008-09, growth is likely to slow down further as high borrowing rates are likely to choke consumers and investments. And this time there will also be the rising prices to deal with.
Growth forecasts for 2008-09 are quite divergent: HSBC India economist Robert Prior-Wandesforde predicts 7% while HDFC's Barua pegs it at an optimistic 8-8.5%.
Wandesforde says higher interest rates, a stronger currency, and weaker global growth, has impacted on economic growth and will continue to do so this year.
Barua is banking on a strong pace of infrastructure development and expectations that retail lending rates are unlikely to go much higher from current levels.
Lehman's Varma and Subbaraman have predicted that measures to curb inflation will come at the cost of GDP growth.
"Growth is already facing headwinds from weakening foreign demand and tight monetary conditions. As a result, we have cut our GDP growth forecast for FY09 (Apr-08 to Mar-09) from 8.3% y-o-y to 7.6%, which is well down from 8.7% in FY08," they wrote in a note on April 11.
Besides, slowing global growth will also pull growth down. The International Monetary Fund (IMF) has predicted a 0.50% drop in global growth to 3.7% this year because of a mild recession in the US. India's growth projection has also been cut to 7.9%.
Slower growth is a consensus among economists. But which sectors will be hit the hardest? Crisil's Joshi says the sectors, which are already reeling under higher rates may feel the pinch. "Sectors like consumer loans, real estate and auto will feel the pinch.
However, some other sectors like pharmaceuticals, food and beverages and consumer non-durables may just not be impacted that much," Joshi said.
Loan growth has been hit in the banking sector as interest rates for housing, cars, and consumer durables have gone out of the reach of consumers. This in turn has had a ripple effect on the real estate and auto sectors.
Lower demand for houses means home prices have fallen but the middle class still can't afford them because of high interest rates.
Barua points out that lower growth is also impacting investment demand together with consumption and export sectors.
"Some of the expansion plans for companies are being put on hold because of the sluggish IPO market. The problems of some of the export-oriented sectors -- textiles and auto components -- are feeding through to other sectors. There appears to be a compression in sectors like textile machinery and machine tools," Barua wrote in HDFC's newsletter Ecotalk.
However, commodity segments like petroleum products, primary commodity exports and metal exports are expected to make strong gains thanks to record oil and metal prices.
Barua sees a "continued momentum" in infrastructure segments such as roads, ports, airports, urban infrastructure, telecom where either the government is a major partner (the Bharat Nirman programme for instance) or where there is sufficient clarity in the regulatory regime to sustain private sector interest (ports , telecom).
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