India's economic gloom deepened on Wednesday as worsening loan quality at the country's biggest lender rattled investors, Moody's downgraded its outlook for banks, and October car sales skidded 24 percent, their worst drop in over a decade. The central bank has raised interest rates 13 times since early 2010 but has failed to rein in inflation, which remains above 9 percent. Instead, asset quality at banks is eroding and growth in Asia's third-largest economy is slowing.
Global weakness is exacerbating the slowdown for an economy that grew at 8.5 percent in the last fiscal year but is on track to expand by as little as 7.2 percent in the current fiscal year, according to some forecasts. Monetary policy in India can take several quarters to have an impact, and Rao said she expected the effect of the prolonged bout of tightening to persist into the middle of the fiscal year that will start in April. On Friday, India is expected to report that industrial output growth slowed to an annual rate of 3.5 percent in September, a Reuters poll found, from 4.1 percent growth in August.
On Tuesday, data showed that growth in merchandise exports, once a bright spot that had seen 82 percent annual growth during July, had slowed to just 10.8 percent for October. Turbulence in the country's biggest export markets, the United States and Europe, prompted officials to predict an export slowdown and a worsening trade deficit in the second half of the fiscal year ending March 2012.
State Bank of India, which has a 25 percent market share, disappointed investors on Tuesday - despite beating profit forecasts - by posting a rise in non performing assets and a 35 percent increase from a year earlier in its provisions against bad loans.
Shares in SBI ended 6.77 percent lower, their biggest percentage drop since mid-May, as investors grow increasingly wary about declining asset quality in India. Several banks have stopped lending to state power distributors as well as to property developers and road projects on worries over asset quality.
The Bombay Stock Exchange banks index fell 2.62 percent, and lenders dragged the broader market index down by 1.18 percent. Sales of cars, which are sensitive to rising interest rates and the rising cost of fuel, fell nearly 24 percent in October from a year earlier, their biggest such drop since December 2010, dragged down in part by labour unrest at leading carmaker Maruti Suzuki.