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Slower GDP Growth Inevitable – Goldman Sachs

April 11, 2008

WPI inflation continued to accelerate to 7.41% yoy in the week ending March 29, from 7% yoy in the previous week. Inflation is now at its highest level since November 2004, and significantly above the Reserve Bank of India’s (RBI) comfort ceiling of 5%.Minerals prices hastened by 42%, while basic metals rose 20% respectively yoy, reflecting a one-time upward adjustment to WPI prices which have been running up for several months.

Goldman Sachs expects RBI to increase the repo rate by 50 bp in its April policy meeting to primarily arrest inflationary expectations and second round effects. The central bank will encourage further INR appreciation.

The latest IP data shows that growth is continuing to moderate, rather than slow sharply. Key coincident indicators such as cellular subscriptions, the PMI, and non-food credit are also pointing towards continued moderation in activity. Goldman Sachs expects GDP growth to slow to 7.8% in FY09 from 8.7% in FY08.

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