India's Slow Growth Is Cyclical, Not Structural; May Prompt RBI To Cut Rates: Fitch (09-Feb-2012)
Declining economic growth rate will contain inflationary pressure and prompt the Reserve Bank of India (RBI) to cut interest rate, as per the rating agency-Fitch. The rating agency said that the slower growth rate of the Indian economy in 2011-2012 is cyclical and not structural and it maintains that India has the potential to grow at a rate of 7.5-8.5% in the future.
The rating agency in its report stated that the slowdown probably reflects the Indian authorities' efforts to correct an overheating economy and could in fact ease inflationary pressures giving the central bank some room to lower interest rates. Further the recent increase in India's PMI data reveal that the slow growth in the manufacturing sector has probably bottomed out and India can expect a recovery in the sector.
These findings have come close to the recent release of Central Statistics Office's (CSO) advance estimates of national income, which showed a slow growth rate of 6.9% for 2011-2012. The slowdown has been on account of the lower growth in manufacturing and agriculture sectors, which are estimated to grow at 3.9% and 2.5% respectively.
Fitch has further observed that India's economic growth has been one of its stand-out features and remains a key support for its 'BBB-' rating with Stable outlook. The country's potential growth rate is well above the 'BBB' category median. From 2006 to 2010, its actual growth rate was more than 2 times the 'BBB' median. It said that India's ratings would benefit from structural fiscal reform leading to improvement in the fiscal deficit, improvement in the investment climate and a sharp, sustained fall in inflation.
The Indian economy grew at 8.4% in 2010-2011 and the government in its mid-year economic review had pegged the growth at around 7.5%. The latest estimate is sharply lower than the 9% growth projection for 2011-12 made by the government in its pre-Budget survey in February last year. However, the economy is now expected to grow at a much lower pace of 6.9% and has been grappling with high levels of inflation prompting the RBI to hike interest rates by 350 basis points between March 2010 and October 2011.
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