News: 'Indian economy to grow 7.3 pct in 2006/07'

(RTR 23/08/2006) Mumbai - India's economic growth is likely to moderate to 7.3 percent in the fiscal year to March 2007, driven by strong domestic consumption and investment, international rating agency Standard & Poor's said on Wednesday.

India's inflation rate should average 5.0-5.5 percent this financial year and the fiscal deficit should improve in coming years although it remained to be seen whether the government would meet all targets set by a fiscal responsibility law, the rating agency said in a report.

Rising oil prices remain the main risk to growth and inflation, while faster improvement of inadequate infrastructure to lift the rate of expansion was not happening due to lack of broadbased political support.

"Notwithstanding these risks, in the current global and domestic scenarios, growth in excess of 7 percent per year over the medium term appears feasible," S&P said.

India, Asia's fourth largest economy, grew 8.4 percent in the year to March 31 and the central bank expects it to expand 7.5 to 8.0 percent in the current fiscal year.

The federal fiscal deficit was 4.1 percent of gross domestic product in 2005/06 and the government expects it to fall to 3.8 percent in the current fiscal year.

The central bank has raised interest rates three times since early January, each time by 25 basis points, and the benchmark short-term rate stands at 6.0 percent.

"Although we believe recent interest rate hikes by the central bank will keep inflation under check in the coming months, upward inflationary pressures persist due to the recent and forthcoming pass-through of oil prices," S&P said.

Headline inflation, as measured by wholesale prices, was running at about 4.8 percent year-on-year in early August.

S&P forecasts the rupee will trade in a range of 45.00-46.00 per dollar by the end of the fiscal year, supported by buoyant corporate profits and a pick-up in portfolio inflows.

The rupee, which hit a three-year low of 47.04 in mid-July, closed at 46.5150/5250 on Wednesday.

The yield on the benchmark 10-year government bond ended at 7.99 percent on Wednesday and S&P said yields could rise in the short-term but should then revert to lower levels by the end of the fiscal year as inflation eased off and growth moderated.

India's widening current account deficit was not yet a concern, S&P said, as capital inflows were more than adequate to cover it and a rising oil and non-oil import bill reflected greater economic activity and growing investment.

Investment had played an increasingly important role in growth in the past two years. It constituted 30 percent of gross domestic product in the fiscal year 2005 and was likely to have risen further in 2006, the report said.