Reserve Bank of India governor D Subbarao expects the next financial year to be a more difficult to susutain India's economic growth.

After meeting chief minister Buddhadeb Bhattacharjee in Kolkata, he said when the RBI had made its October announcements during the mid-term monetary policy review, it had ''estimated the 2008-09 growth rate at 7.5-8 per cent with a downside bias.''

The economy, as per the official growth estimates, has recorded a growth rate of 7.8 per cent in the first half of the current fiscal, down from 9.3 per cent in the year-ago period.

''2008-09 will be a difficult year and 2009-10 will also be a difficult year… perhaps more difficult. IMF has revised global growth and growth of emerging economies. Reflecting that we will be doing our numbers,'' said the governor.
 
The RBI governor's assessment has come on the heels of a fiscal stimulus package comprising additional spending and excise duty cuts that should boost consumption to implement a course correction away from the slowing global economy (See: Emphasis on infrastucture to help economy grow).

The fiscal package followa a key interest rate cut by the Reserve Bank of India on Saturday (See: RBI boosts liquidity; relief for real estate, export, small sectors), and has Rs20,000 crore in additional expenditure, accompanied by an across-the-board four per cent excise duty cut amounting to Rs8,700 crore. Additionally, it also has benefits worth Rs2,000 crore for exporters by way of a two per cent interest subvention for labour-intensive export sectors. 

Bond yields fell sharply on RBI's announcement. They traded close to their lowest in nearly four years on Thursday afternoon as the announcement raised hopes of further rate cuts. It briefly fell to 6.49 per cent, the lowest since February 2005.
 
RBI following signals
RBI's downwards revision of forecast should hardly come as a surprise.

Many international agencies and banks have been revising downwards growth forecast of most Asian economies including India.  In a recent report, Asian Development Bank  notes that current developments are challenging India's strong growth performance of recent years.

Emerging capacity constraints, continued rapid expansion in credit, and an increase in global commodity prices have combined to trigger a spike in domestic inflation.

The report warns that global commodity prices and domestic demand growth supported by price subsidies will continue to place upward pressure on prices.

Further, the government's attempts to rein in inflation through monetary policy tightening combined with ad hoc interventions, including reduction in customs duties and bans on export of essential commodities, are having limited impact. Real interest rates have actually fallen and the projections for the inflation rate, based on the wholesale price index, have been adjusted upward to 11.5 per cent in FY2008 and 7.5 per cent in FY2009.

''The Indian economy is now at a critical juncture where policies to contain inflation and ensure macroeconomic stabilisation have taken center stage,'' says Ifzal Ali, chief economist of the Manila-based multilateral development bank.