A day after the RBI hiked its short-term lending rate, a global rating agency on Thursday said the central bank may increase rates further, while also predicting an economic slowdown.
NEW DELHI: A day after the Reserve Bank of India (RBI) hiked its short-term lending rate, a global rating agency on Thursday said the central bank may increase rates further, while also predicting an economic slowdown.
"Amid tight monetary policy conditions which weigh on household consumption and business investment, the Indian economy looks set to slow this year," Moody's Economy said in a report.
"Moody's Economy.com expects GDP (gross domestic product) growth to decelerate from an impressive 8.9 percent in 2007 to around 8 percent in 2008," the agency said.
The report came in the backdrop of India's industrial production registering a slower growth of 7 percent for April as against 11.3 percent for the like month of the previous year.
According to the rating major, if prices continue to spiral in July, it would indicate that existing monetary policy measures were not tight enough, forcing another hike in interest rates and cash reserve ratio.
The central bank had raised the repo rate (the interest paid by commercial banks for short-term borrowings from the central bank) for the first time in over a year to 8 percent from 7.75 percent on Wednesday.
"The biggest challenge facing central banks across Asia is to cool inflation without hurting economic growth. The RBI is no exception," said the agency's report, prepared by its economist Sherman Chan based in Sydney.
"As global oil prices continue to soar, the government will likely announce further increases in energy prices and cuts in subsidies. Thus, inflation risk is still biased toward the upside".
Given that inflation is the biggest obstacle of the United Progressive Alliance (UPA) government, not in an election year, the authorities will continue to hand out assistance to the poor and try to tame inflation, the agency said.
"Robust first quarter GDP numbers which confirmed that the Indian economy remained in a healthy shape should have given the central bank an injection of confidence to tighten monetary policy more aggressively."
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