UBS latest to cut India's FY12 growth forecast to 7.7 pct

(Reuters) – UBS on Wednesday joined the growing list of brokerages lowering India’s 2011/12 economic growth forecast, paring Asia’s third-largest economy’s growth to 7.7 percent from 8 percent, as interest rate rises and higher oil prices start to bite.

Morgan Stanley and Bank of America-Merrill Lynch had last week lowered their growth forecast for the Indian economy in the next fiscal year that begins in April to 7.7 percent and 8.2 percent.

UBS also cut the world’s second-fastest growing major economy’s gross domestic product forecast for the current fiscal year to 8.7 percent from 9 percent on weak December-quarter growth and continuing weakness in the industrial output growth.

“The reason for the slowdown is as before: lagged impact of todays tight money on demand plus effect of higher oil prices,” Philip Wyatt, an economist at UBS wrote in a note, adding he sees the economy recovering to 8.6 percent growth in 2012/13.

India’s economy grew at a slower-than-expected 8.2 percent in the December quarter from a year earlier, after expanding at 8.9 percent in the previous two quarters.

Industrial output in January topped forecasts, but was still weak at 3.7 percent annual rise.

“We expect WPI (wholesale price index) inflation to accelerate from 7 percent in March 2011 to 7.7 percent a year hence,” Wyatt wrote.

India’s headline inflation unexpectedly quickened in February on rising fuel and manufacturing prices, raising expectations for aggressive central bank tightening beginning later this week.

The market and economists both expect a 25 basis points increase in key rates on Thursday, when the Reserve Bank of India (RBI) reviews its monetary policy.

UBS said the slowdown in the industrial production (IP) growth suggests policy-pause is round the corner.

“Slower IP trends indicate weaker domestic pricing pressures, but lending growth remains way above the official 20 percent projection. So, we still expect the RBI to act on March 17 – with a 25 basis points. But after this, we could see a policy pause,” Wyatt said.

Indian bank loans rose 23.2 percent on year as of Feb. 25, latest data showed on Friday.

UBS said rate increases would make an effort to bring lending growth back closer to 20 percent and reduce the still elevated price pressures.

“Our calculations suggest that if global oil prices don’t rise too much further, then inflation could stay in the 7-8 percent range this year. Consequently, the money tightening process could be near an end,” Wyatt wrote.

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