Goldman cuts India's FY10 GDP forecast to 7.2%

Goldman Sachs has reduced India's growth forecast for fiscal year 2010 to 7.2 per cent from 8.2 per cent earlier due to a weak investment outlook on account of rising interest rates, it said in a note on Monday.

Investment has been an important driver for growth in recent years, contributing to nearly half of total GDP growth in fiscal year 2008, the investment bank said.

"With significantly higher rates than at the start of the year, we expect financing issues to become a key hurdle, especially for new investment plans," Tushar Poddar and Pranjul Bhandari, economists at Goldman Sachs, said in the note.

However, the growth forecast for FY09 remains unchanged at 7.8 per cent.

"The government has imparted a massive fiscal stimulus by means of greater spending on a rural employment scheme, a debt waiver to farmers, and wage hike to civil servants. These will continue to bolster demand and growth," they wrote.

Goldman Sachs has also raised its inflation forecast for both FY09 and FY10. For FY09, the forecast has been raised to 11.5 per cent from 10 per cent earlier, while for FY10 it has been increased to 5.3 per cent from 4.7 per cent earlier.

India's annual inflation rate was holding just below 12 per cent in mid-July, data showed on Thursday.

Inflation is likely to come off in FY10, due to weakening demand driving growth below potential, a slowdown in the rate of change of commodity prices, a favourable monsoon, well-anchored inflationary expectations, ongoing productivity change and a very high base from 2008.

Goldman's forecast for the rupee for three, six and twelve months remains unchanged at 43.9, 44.1 and 42.2 respectively against the dollar.

At 1.05 p.m. the partially convertible rupee was at 42.34/35 per dollar, weaker than 42.26/27 at close on Friday.

High oil prices are expected to continue to worsen the current account deficit and put depreciating pressures on the rupee in the near term.

"Over a 12-month period, however, we expect the rupee to appreciate as inflation begins to come off and becomes a catalyst for more sustained inflows," wrote Poddar and Bhandari.

The monetary policy would continue to remain tight in 2008, but start easing gradually in 2009. The central bank is seen raising the repo rate and cash reserve ratio by 50 basis points each by end-October, and then pause.

"As demand begins to fall and inflation starts coming off in early 2009, we expect the Reserve Bank of India to...