Low growth will moderate inflation, lead to rate cut: Fitch

Declining economic growth rate will moderate inflationary pressure and prompt the Reserve Bank to lower interest rate, ratings agency Fitch has said.

"The cyclical downturn could help further ease inflation, which appears to have passed its peak. This will give the Indian central bank room to move to a more accommodative monetary policy, after recent increases in policy rates," Fitch Ratings said in a report today.

The report came a day after the release of the Advanced Estimates by the Central Statistical Organisation (CSO) which said that economic growth in 2011-12 is expected to be 6.9%, lowest in three years, on account slowdown in manufacturing and agriculture.

The Indian economy expanded by 8.4% in 2010-11.

The CSO's GDP growth projection is a tad lower than the 7% forecast made by the Reserve Bank of India in its quarterly monetary policy review last month.

In its mid-year Economic Review, the government had pegged the growth at around 7.5%. The latest estimate is a sharply lower than the 9% growth projection for 2011-12 made by the government in its pre-Budget survey in February last year.

"Fitch Ratings reiterates that it expects a cyclical slowdown rather than a structural downturn for India, following the CSO's advanced estimate... The slowdown probably reflects the authorities' efforts to correct an overheating economy," the report said, adding that the Advanced Estimates confirms a slowdown in the Indian economy.

Fitch had earlier revised its GDP growth forecast for India this fiscal to 7% from the earlier estimate of 7.5%.

"We maintain our view that India is not facing a structural deterioration in its potential growth rate of 7.5-8.5%," it said.

It also said that manufacturing sector growth is likely to be go on an upswing from now.

As per the Advanced Estimates, manufacturing growth is also expected to drop down to 3.9% in this fiscal from 7.6% last year.

Agriculture and allied activities are likely to grow at 2.5% in 2011-12, compared to a robust growth of 7% in 2010-11.

India Inc has blamed the high interest rate regime, which is led to an increase in the cost of borrowings, for hindering fresh investments and leading to industrial slowdown.

RBI hiked interest rates by 350 basis points between March 2010 and October 2011 to tame inflation, which was above 9% for most of last two years.

However, headline inflation fell to a two-year low of 7.47% in December.