India's economy grew at its slowest annual pace in five quarters in January to March as rising interest rates crimped consumption and investment, suggesting the central bank could temper the pace of further tightening to tackle stubbornly high inflation.
Gross domestic product in Asia's third-largest economy rose 7.8 percent from a year earlier, lower than 8.3 percent in the previous quarter and below the median 8.2 percent forecast in a Reuters poll. The figures provided the latest evidence of a slowdown in so-called BRIC nations, which revived quickly from the global financial crisis, after growth in China and Russia eased in the same quarter. Brazil has yet to report its data for the period. India's January-to-March growth was the weakest since October-to-December of 2009 and also marked the fourth consecutive slowdown in economic activity.
"The slowdown is worrying as it happened before recent acceleration in monetary tightening," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong. "It may help reduce inflation, and we stand by our call that RBI will hike only by 50 basis points in the remainder of the year," he said.
Early this month the Reserve Bank of India (RBI) raised rates by half a percentage point, declaring some near-term growth would need to be sacrificed to tame inflation, which stood at 8.66 percent for April. Many economists expect growth to fall below 8 percent in the current fiscal year to March 2012 as the central bank moves to get inflation down to 6 percent, its end-year target.
Shankar expects India's policy rate of 7.25 percent to rise by 25 basis points in June and then another 50 bps by the end of the March 2012. The GDP data showed that the central bank's nine rate rises since March 2010 are having an impact. Annual consumer spending growth slowed in the March quarter to 8 percent from 8.6 percent in the previous quarter and investment was almost flat after growing 7.8 percent in the December quarter. Since the quarter ended, there have been further signs of a slowdown. April car sales rose at their weakest pace in nearly two years as buyers were also put off by the rising cost of fuel and vehicles.
Growth has also been hurt by delays in big projects over environmental clearances and land disputes, as well as government paralysis as it fought a series of corruption scandals. Bond yields and swap rates fell by a couple of basis points immediately after the data release, which was seen to ease pressure on the central bank to tighten rates aggressively. The 30-share BSE index briefly pared gains before resuming its rise, ending 1.5 percent higher.