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Soft Landing of Economy – Very Likely

October 3, 2008

Amidst Global Financial Crisis, the Indian Economy is likely to end up with a Soft Landing after 5 years of growth. In a report, Merill states that the soft landing is possible only due to lower crude oil prices which will cool of the double digit inflation but the bad news is growth cycle is irretrievably past peak with the return of capacity exhaustion.

Merrill has cut FY10E inflation forecast to 5.5% (from 6%) to price in lower oil
prices, in-line with RBI expectations of 5%. RBI to ease the money market to reverse repo mode (at a higher 6.5% LAF reverse repo rate) from the present repo mode (at the 9% LAF repo rate).

US$90/bbl will likely ease pressure on the government to hike prices drastically. The current account deficit will likely slip to 2.7% of GDP in FY09 (from 3%) and 1.9% in FY10 (from 2.3%). This will put the macro numbers in better shape.

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