Rate cut seen as growth slows sharply

Economic growth slowed much more than expected in the December quarter, slumping to its weakest pace in almost six years and raising expectations the central bank would cut rates, possibly as soon as this weekend. Both manufacturing and farm output in Asia's third-biggest economy dropped from a year earlier and the data prompted a weak share market to extend losses to more than 2 per cent, which in turn pushed the rupee to a record low. Figures provide the latest evidence of the impact in Asia of the global financial crisis that has already forced Japan, Singapore and Hong Kong into recession and pushed Thailand and South Korea into economic contractions. "We have been calling for significant rate cuts for a long time. We are looking for a 100 basis points cut as soon as probably tomorrow in the repo rate and reverse repo rate," said Sailesh Jha, senior regional economist at Barclays Capital. "After seeing this number, I think the market is now pricing in a 100 basis points cut." The economy in the December quarter grew by 5.3 per cent from a year earlier, below forecasts of 6.2 per cent and the previous quarter's growth of 7.6 per cent. It marked the slowest growth since the March quarter of 2003, and while India is far from recession many analysts say growth is grinding down to level that threatens jobs and a rise in poverty, underlining the need for more action by policy makers to stimulate activity. The central bank cut its main lending rate, the repo rate, by 350 basis points to 5.50 per cent in four moves between Oct 20 and Jan 2, but it held rates steady at a review in late January because banks were yet to pass on the full extent of its rate cuts.

DISMAL DATA

India's economy has lost altitude from growth rates of 9.0 per cent or higher in the past three fiscal years, and economists said the government's forecast of 7.1 per cent growth in the 2008/09 fiscal year ending March 31 would not be met. "The overly optimistic projection now needs to be revised downward," Moodys, economist Sherman Chan said. "The sharper-than-expected deceleration in the December quarter perhaps makes up for the slowdown that should have taken place in the September quarter when the rest of the region began to show strong signs of fatigue," she said in a report. But junior finance minister Pawan Kumar Bansal said the government still expected growth of around 7 per cent in 2008/09, and had anticipated December quarter growth would be below market expectations.