India growth at 3-¢yr low but rates to stay tight

Annual growth for India's April-June fiscal first quarter was 7.9 percent, data showed on Friday, lower than the median forecast in a Reuters poll of 8.1 percent and 8.8 percent in the March quarter.

Analysts said growth remained robust, but higher interest rates and oil and commodity prices were taking their toll and expansion for the fiscal year was likely to be about 7.5 percent, from rates of 9 percent or more in the previous three years.

"In the face of good growth and loose fiscal policy, I don't expect any relaxation in the central bank's tight policy stance even though inflation has moderated slightly," said Indranil Pan, chief economist at Kotak Mahindra Bank.

India, whose economy is less export-oriented that many of its Asian neighbours, is keen to see expansion of 8-10 percent to reduce poverty and create jobs.

China saw economic growth slowing in the first half but still in double digits, while Singapore and Hong Kong, Asia's most open economies, reported quarterly contractions in April-June.

Finance Minister Palaniappan Chidambaram said India was seeing a high degree of savings and investment which made him confident it would achieve its growth target.

"This year also growth will be close to 8 percent, and close to 8 percent growth is not something to be scoffed at," he told reporters in Mumbai.

Service growth slows

India's markets took the data calmly. The 10-year bond yield stood at 8.67 percent, after briefly dipping 1 basis point. The rupee was a shade lower on the day at 43.78/79 per dollar while stocks were up 3 percent, helped by some moderation in inflation and gains in Asia.

Inflation in India has raced above 12 percent to its highest in the 13 years the current series has been available, largely due to surging oil and food prices, although data on Thursday showed the annual rise had moderated slightly in mid August.

The central bank raised interest rates three times in June and July, lifting its key lending rate to a seven-year high of 9.0 percent to dampen persistent demand pressures and discourage knock-on price increases from a hike in state-set fuel prices.

Economists said a loan waiver to farmers from the government and a steep hike in government employees' salaries this year would provide a boost to output.

"Consumption spending is going to get a boost from an expansionary fiscal policy in the second half of the year," said Gaurav Kapur, economist at ABN AMRO.

Manufacturing grew an annual 5.6 percent in the June quarter, slightly slower than 5.8 percent in the March quarter, while agriculture expanded 3.0 percent, a touch faster than previously.

Economists noted services, which form more than 50 percent of economic output, had braked faster than other sectors, slowing to 10.0 percent growth from 11.2 percent in the previous quarter, which they said was the weakest in three years, as global financial market turmoil took its toll on local markets.

"The prolonged slowdown in manufacturing does now finally look to be spreading to services, with financial services growth showing the biggest decline from 10.5 percent to 9.3 percent," said Robert Prior-Wandesforde at HSBC.