Tight monetary policy weighing on consumption spending: Over the last 12 months, relatively high bank lending rates have resulted in a sharp reduction in consumption growth. Retail loan growth decelerated to 172% during the quarter ended March 2008 compared with an average of 50.1% between F2004 and F2006. Consequently, industrial production decelerated to 5.8% during the quarter ended March 2008 from the peak of 15.8% in November 2006.
Macro environment has deteriorated further: First, credit market developments in the US and Europe have reduced risk capital allocation to emerging market debt as well as equities. This will affect India 's capex cycle. Second, high commodity prices boosted the headline inflation rate to 8.1% during the week ended May 17, 2008, from 3.1% during the week ended November 24, 2007. In our view, this implies that the RBI is unlikely to initiate the much-needed policy rate cuts.
Risk aversion is also rising in the domestic banking sector: In addition to the trend in the global credit markets, India has witnessed a rise in credit spreads in the domestic banking sector. Over the last six to nine months, banks have become increasingly risk averse to disburse consumer loans. Credit spreads are also widening for corporate sector borrowing.
Growth to decelerate further: We believe that in that weak consumption growth and slowing business investment will slow GDP growth further. We expect GDP growth to decelerate to 6.7% during the quarter ended March 2009 from 8.8% during the quarter ended March 2008.
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