(Adds bond market close)
By Surojit Gupta and Rajkumar Ray
NEW DELHI Aug 13 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
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
"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.
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
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
"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)