Indian growth slows as higher interest rates bite

India's economy posted growth of 8.5 percent, India's Central Statistical Organisation has reported India's economic growth slowed to 7.8 percent in its fiscal final quarter as an aggressive series of interest rate hikes hit activity, according to official data Tuesday. The January-March figure was down nearly a percentage point from 8.6 growth logged in the same period last year and was also off the 8.3 percent expansion in the third quarter.
The Indian central bank has raised interest rates nine times in the past 15 months to curb stubbornly high inflation, which is running at 8.6 percent and has caused huge hardship to the country's hundreds of millions of poor.
"Looking ahead, we believe the omens for Indian growth are not particularly good," said Credit Suisse economist Robert Prior-Wandesforde.
The "lagged effect of the sizeable tightening of monetary policy together with the 20-percent rise in crude oil prices this calendar year is likely to take a sizeable toll on economic activity," he said.

The quarterly performance was below market consensus expectations that Asia's third-largest economy would grow 8.2 percent and was well below rival emerging market giant China's 9.7 percent expansion.
However, for the full year India's Central Statistical Organisation said the economy grew 8.5 percent, well up from the 7.4 percent of 2009-2010.
Prior-Wandesforde said he doubted the weaker than expected quarterly performance "will put an end to the rate hikes given the Reserve Bank of India’s inflation-fighting focus."

Controlling inflation which has been uncomfortably high for over a year is an overriding priority for the Congress-led government, with poorer households -- the backbone of its support -- especially hard-hit by rising food and fuel costs.
"The process of taming inflation will ultimately be damaging to growth," said Morgan Stanley economist Chetan Ahya in a commentary published Tuesday.
During the quarter ending March 31, growth in the manufacturing sector slowed to 5.5 percent from 15.2 per cent in the same quarter of the previous year.

The service sector, which now accounts for more than half of India's gross domestic product, was up 8.7 percent in the quarter, the weakest showing since October-December 2004, economists said.
India's benchmark Sensex share index initially retreated on the figures but recovered to trade up 1.31 percent at 18,470.33 in early afternoon, buoyed by a surge in Asian stocks.
Indian Prime Minister Manmohan Singh warned at the weekend the country's growth in 2011-12 would likely miss the government's nine percent target as rising commodity prices, especially oil, and stubborn inflation slow activity.

India's central bank earlier this month lowered its growth projection to eight percent.
Some private economists expect growth for the year to be even lower, with Morgan Stanley investment house forecasting 7.7 percent and Credit Suisse pegging it at 7.5 percent.
The weaker quarterly performance comes as the government has been struggling to attain double-digit growth to overcome crushing poverty in the nation of 1.2 billion people.
High growth is essential to fund social projects such as the proposed Right to Food Act to feed India's poverty-stricken millions, government leaders say.
But the central bank has said short-term economic growth may have to be sacrificed in the fight against inflation.