Goldman Sachs expects impact on India's macro outlook on the basis of an internal assessment of oil prices at $141/barrel for 2H2008 to moderate, but not slow down completely.

"We expect growth to continue to moderate, but do not envisage a sharp slowdown. Growth is being underpinned by investment and consumption demand, and although downside risks have increased, we think that a strong fiscal stimulus will largely offset the negative terms-of-trade shock," the investment bank has noted in its Asia Economic Flash, in its country report on india titled, India: Higher oil; rising inflation; weaker rupee.

The investment  bank anticipates higher inflation due to higher oil prices and has revised its near-term average WPI inflation forecast to 7.5 per cent year-on-year from an already above consensus 6.5 per cent Y-o-Y.

IT also expects the current account and fiscal deficits to bear the brunt of the oil price increase, and, rise to 3.5 per cent and 7 per cent respectively on a GDP of 7.8 per cent, "although downside risks have increased due to higher oil prices. We think that in the near term, the large fiscal stimulus, in part through oil subsidies will largely offset the negative terms-of-trade shock," it noted.

"We expect weakness in the rupee (INR) to persist in the near term due to the large impact of high oil prices on the current account, weaker inflows, and the Reserve Bank of India's decision to not use the exchange rate for controlling inflation. We are revising our 3, 6 and 12-month USD/INR forecasts to 43.9, 44.1 and 42.2 respectively.

As a consequence it expect monetary policy to "remain on a tightening path, with a bias towards measures to absorb liquidity through reserve ratio increases, rather than through rates".