NEW DELHI (AFP) – India could face more monetary policy tightening as it battles inflation but fears its economy will suffer a “hard landing” are unfounded, investment bank Goldman Sachs says.
The bank made the comments as it launched a new monthly Financial Conditions Index or FCI to forecast the monetary policy and business cycle of Asia’s fourth-largest economy.
“Even after the current spate of rate increases, financial conditions remain supportive of growth, and thus concerns of a hard landing are overdone,” according to the index’s first monthly reading.
The index suggests “financial conditions are not very tight when viewed in a historical context,” Goldman Sachs added in the statement released on Friday.
The bank saw scope for further monetary tightening by the Reserve Bank of India “to reduce effervescent demand” and combat inflation.
The wholesale price index, India’s most closely watched inflation monitor, fell Friday below six percent for the first time in nearly three months.
Inflation slipped to 5.74 percent in the week ended March 31 from 6.39 percent a week earlier, according to official data.
Last December, inflation broke above the central bank’s target range of 5.0-5.5 percent, prompting a slew of monetary tightening measures.
Late last month, the bank lifted a key lending rate by 25 basis points to 7.75 percent — the highest in more than four years.
It also hiked the amount of cash commercial banks must hold on deposit by 50 points to 6.50 percent to suck out cash and curb rampant credit growth — its third such increase in four months.
Goldman Sachs forecast interest rates will have to be raised by 50 basis points and money supply growth brought down to 15.7 percent from 20 percent to ease demand.
Economic growth needs to be reduced to a sustainable level of about eight percent, it added.
The economy is estimated to grow by 9.2 percent in the financial year to March 31, 2007 with expansion running at an average 8.6 percent during the past four financial years.
Subduing inflation has become a priority for the ruling national Congress party, which is fighting elections in India’s most populous state, Uttar Pradesh.
The cost-of-living surge was cited by analysts as a key factor in the party’s defeat in two state elections in February.