S&P says domestic demand to drive Indian economy

By Saikat Chatterjee and Anurag Joshi,

MUMBAI (Reuters) - India's economic expansion is being driven by strong local demand, and a moderation in growth in the current fiscal year was a "soft landing", international ratings agency Standard and Poor's said on Tuesday.

Despite adverse global developments, S&P forecast the Indian economy to grow 8.6 percent in the fiscal year ending in March 2008, slower than 9.4 percent in 2006/07 but a notch higher than the central bank's forecast of 8.5 percent.

"Overall, while global developments have made the environment more risky, the strength of domestic demand is expected to keep the Indian economy on a relatively high growth trajectory," S&P said in a report.

In the calendar year 2007 and 2008, S&P expects the economy to grow 9 percent and 8.8 percent respectively.

The ratings agency said Indian interest rates were clearly peaking. The central bank has raised its main short-term lending rate five times since last June, with the last increase taking effect in March, to cool demand pressures in the world's fastest growing major economy after China.

The next monetary review is scheduled on Oct.30.

S&P expects the farm sector, which contributes nearly one-fifth to the gross domestic product, to grow 3.4 percent in 2007/08, helped by a good monsoon.

The industrial sector is expected to expand by 9.2 percent, slower than the previous year, reflecting rising interest rates and appreciation of rupee, S&P said. Factory output grew 11.3 percent in 2006/07.