UBS cuts 2009 India GDP f'cast to 7.1 pct from 7.7

MUMBAI, July 25 (Reuters) - UBS on Friday cut its forecast for Indian economic growth in 2008/09 to 7.1 percent from 7.7 percent earlier, as high inflation and rising interest rates bite into consumer spending.

Light and heavy industry absorb around 47 percent of commercial bank credit, and high interest rates coupled with soaring raw material costs have also hit the industrial side hard, according to Philip Wyatt, economist at UBS.

Industrial production, which accounts for 20 percent of GDP, expanded by 5.8 percent in the March quarter, slower than 8.6 percent in the previous quarter.

"The average rate of inflation will remain higher," Wyatt said. "There is increasing risk that the government would have to deregulate prices which would hit discretionary spending and encourage policy interest rates to stay higher for longer."

India's central bank raised its key lending rate by 75 basis points to 8.5 percent in June and increased banks' reserve requirements by 50 basis points to rein in inflation.

Annual inflation was 11.9 percent in mid-July and is holding at its highest levels since the current inflation series became available in 1995.

The central bank holds a review on July 29 and seven out of 11 economists in a Reuters poll expect it to raise the key lending rate by 25 to 50 basis points.

UBS expects the total fiscal deficit, including off-budget items, to account for 7.5 percent of GDP in 2008/09 and estimates the average rate of inflation at 8.7 percent this fiscal year.

The Swiss bank expects the current account deficit to widen to 3 percent in the current year and in 2009/10, from 1.5 percent last fiscal year as a global slowdown hurts exports, while imports continue robust due to high oil prices.

"Shorter term, the government needs to take more affirmative action to rein back the fiscal deficit and the central bank needs to keep monetary policy tighter for longer," Wyatt said. "Both these policies have negative implications for GDP growth." (Reporting by Saikat Chatterjee; Editing by Charlotte Cooper)