Aggressive anti-inflation moves by India's central bank will slow scorching economic growth but are unlikely to result in a "hard landing," economists say. The Reserve Bank of India surprised markets late last month when it sharply tightened monetary policy, alarming industry which forecast a demand downturn and dismaying borrowers whose housing, car and other loan repayments jumped.
"They pressed on the brakes a bit hard, but there's no indication that this is going to produce any kind of serious slowdown," said D.K. Joshi, economist at Indian rating agency Crisil, citing the economy's core robustness.
"This year we are looking at growth of 7.9 percent to 8.4 percent down from 9.2 percent in the last year (to March 2007)," he added.
India's growth has been the second fastest in the world and pushed inflation to two-year highs, hurting the purchasing power of its poor masses.
Still, economists said the central bank must tread carefully in tightening further to combat inflation, now running at 6.39 percent, nearly a percentage point above the bank's tolerance ceiling of 5.50 percent.
J. P Morgan economist Rajeev Malik noted the cautionary example of monetary tightening in 1989 by the Bank of Japan "that burst the property bubble, pushing the economy flat on its back for the next several years."
"The door to the infamous Hall of Fame of policy mistakes is wide open," said Malik, who called the latest moves by the bank "shock therapy."
The bank lifted a key lending rate by 25 basis points to 7.75 percent - the highest in over four years. It also hiked the amount of cash commercial banks must hold on deposit by 50 points to 6.50 percent as it sought to suck out cash and curb rampant credit growth - its third such increase in four months.
The bank has been tightening steadily since late 2004 to subdue inflation.