India expects growth to slow to 8.7 pct in 2007/08

India expects its economy to expand 8.7 percent in fiscal 2007/08, slower than the previous year as higher interest rates dent consumer demand, and analysts expect growth to cruise at a similar speed next year.

While still strong, Asia's third-largest economy has lost altitude from the heady 9.6 percent expansion seen in 2006/07 and 8.7 percent would be the slowest growth in three years.

But Reserve Bank of India (RBI) chief said Thursday's official estimate would not alter the RBI's wait-and-see approach as the figure was broadly in line with its forecast of 8.5 percent for the fiscal year that ends on March 31.

Analysts had been looking for gross domestic product to moderate this year from its fastest pace in 18 years in 2006/07, with a Reuters poll forecasting expansion of 8.7 percent.

"Clearly moderation has set in, essentially driven by industrial moderation," said Shubhada Rao, chief economist with Yes Bank.

"Going forward in (fiscal year 2008/09) we expect growth to maintain 8.5 percent levels, led by infrastructure spending."

Financial markets were cool to the estimate, the first for this fiscal year, with the partially convertible rupee dipping to 39.5450/5600 per dollar from about 39.49/50.

The benchmark 10-year federal bond yield was initially stable at 7.49 percent but later slipped to 7.47 percent after the RBI said inflation was contained.

Growth in manufacturing, which makes up nearly 15 percent of GDP, was expected to slow to an annual 9.4 percent from 12 percent the previous year, the central statistics office said.

HIGH RATES BITE

The RBI raised interest rates five times in 10 months from June 2006 and tightened banks' reserve requirements repeatedly last year to restrain inflation and credit growth.

Annual inflation, as measured by wholesale prices, has subsided to just below 4 percent, below the central bank's comfort ceiling of about 5 percent. But the monetary authority kept rates steady last month, saying inflation risks persisted.

Just over half the analysts polled by Reuters after that decision saw the central bank cutting rates by 25-50 basis points by June while the rest saw no change for the next five months at least.

RBI officials told reporters on Thursday inflation had been contained but Governor Yaga Venugopal Reddy said the "inherent logic" of last week's rate decision had not changed.

"There is no fresh information that requires any particular response," he told reporters. "We are watching the evolving uncertainties."