Goldman cuts India's GDP forecast

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Mumbai, October 13: : Goldman Sachs on Monday cut its estimate for India's economic growth to 7.5 per cent for year ending March 2009 from 7.8 per cent earlier, as external demand growth and investment growth are likely to reduce.

The research house now expects the Reserve Bank of India (RBI) to cut the repo rate, its key lending rate, by 50 basis points at its Oct. 24 monetary policy review or earlier. It had earlier predicted a rate cut in the first quarter of 2009.

Deteriorating global financial conditions, evidence of weakening activity, tight domestic liquidity and rapidly falling commodity prices suggest to us that the focus of the monetary policy should and will shift to ensuring financial stability and growth over inflation, Tushar Poddar, economist, wrote.

The repo rate may be further cut by another 100 basis points by the end of first quarter of 2009, he added in the note.

The central bank is also likely to continue to infuse liquidity into the system through further cuts in the cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

The RBI last week cut the CRR, or the proportion of deposits that banks must hold as cash with the central bank, by 150 basis points to 7.5 per cent from 9 per cent to ease tight cash supply, releasing about 600 billion rupees in to the banking system.

SLR, or the proportion of deposits that banks must invest in government debt, is currently at 25 per cent.

FY10 GROWTH

The research house also cut its growth forecast from fiscal year 2009/10 to 7 per cent from 7.2 per cent earlier.

If the turmoil in the financial markets and the very tight liquidity in the domestic markets continue through the next few months, the growth outlook, especially for FY10 may deteriorate further, Poddar wrote in the note.

However, falling commodity prices, especially crude, should help improve the economy's terms of trade, as India is a large net importer of commodities, he added.