UPDATE 4-Indian growth seen missing c.bank fiscal yr estimate

(Adds bond market close)

By Surojit Gupta and Rajkumar Ray

NEW DELHI Aug 13 (Reuters) - India's slowing economy will miss the central bank's growth estimate for 2008/09, while inflation may hit 13 percent soon and will fall to single digits with sustained tight monetary policy, a government panel said on Wednesday.

The 10-year benchmark bond yield IN082418G=CC jumped 11 basis points to close at the day's high of 9.09 percent as the inflation comments strengthened expectations of further monetary tightening to add to an interest rate rise last month.

In its economic outlook for the 2008/09 financial year, Prime Minister Manmohan Singh's Economic Advisory Council said high interest rates triggered by an earlier surge in oil and commodity prices and global market turmoil would moderate growth.

It estimated Asia's third-largest economy would grow 7.7 percent in the year to the end of March, below a recent forecast from the central bank of 8 percent. It has grown by an average of 8.8 percent over the past four years.

But the report added that the central bank would have to maintain a tightening bias to trim inflation to 8-9 percent by the end of the fiscal year, from around 12 percent now.

C. Rangarajan, the outgoing chairman of the panel, told a news conference that inflation, which has nearly tripled this year due to strong prices of oil and foods, could reach 13 percent soon.

"The downside risk to our growth expectations in 2008/09 is primarily from a further deterioration in global conditions with its attendant impact on India -- be it in the sphere of oil prices or capital markets," the panel said in its report.

Adverse global economic conditions were also expected to widen the current account deficit and put pressure on the budget by raising subsidy bills.

A majority of analysts expect growth in India to slow as policymakers struggle to fight rising prices by raising interest rates, tightening liquidity and cutting import duties.

Finance Palaniappan Chidambaram later told reporters he expected the economy to expand close to 8.0 percent in 2008/09.

As well as pushing bond yields up, the report helped to send the stock market down 0.8 percent on concerns over growth.

SLOWING GROWTH

The panel said coordinated policy action at home, cooling commodity prices and action by other central banks could help to bring India's inflation down to 8.0-9.0 percent this fiscal year.

Analysts said the report supported the widely-held view that India's scorching pace of growth would cool, but said inflation could be lower than the panel's fiscal year-end estimate.

"The downward revision in the panel's GDP growth outlook to 7.7 percent in FY09 is in line with our view that growth will moderate this year," said Sonal Varma, economist at Lehman Brothers in Mumbai. "However, we expect the slowdown to spread from industrial to the services sector and therefore have a lower GDP forecast of 7.3 percent."

The Reserve Bank of India (RBI) has raised its benchmark lending rate by 50 basis points to 9.0 percent, its highest in seven years and the third increase in two months.

It also increased the proportion of funds banks must keep on deposit to 9.0 percent to tighten liquidity.

The panel said budget deficit targets for 2008/09 would be exceeded and serious fiscal risks were arising from growing off-budget liabilities estimated at 5 percent of GDP.

Hefty fuel subsidies, loan waivers for millions of poor farmers and proposed salary increases for government employees are constraining the country's finances.

"Despite appreciable fiscal consolidation, large and growing off-budget liabilities are however a matter of concern. With these included, the fiscal situation no longer looks stable and sustainable," the panel said. (Additional reporting by C.K. Nayak, Nigam Prusty and Saikat Chatterjee in MUMBAI) (Editing by Mark Williams/David Stamp)