Tight money policy to moderate growth in 2011: Nomura

The tight monetary policy of the Reserve Bank and declining capital goods output is expected to moderate India's economic growth rate to 8% in 2011 from 8.6% in the previous year, global research firm Nomura said.

"In 2011, slower agriculture output, increased margin pressure from rising cost to manufacturers, adverse base effects and lagged effects of policy tightening should restrain growth to 8% Y-o-Y," Nomura economist Sonal Varma said in the report, 'India Economic Outlook'.

In view of rising inflation, the Reserve Bank has hiked key policy rates eight times since March, 2010. The report said industrial activity during 2011 has suffered on account of rising raw material costs, among other things.

In its mid-quarterly policy review last week, the RBI hiked repo (lending) and reverse repo (borrowing) rates by 25 basis points each to 6.75% and 5.75%, respectively.

"Industrial activity has suffered because of rising raw material costs, higher wages and sluggish investment, restraining demand for capital goods production," Nomura said.

India's industrial output growth in January slowed to 3.7%, compared to 16.8% in the year-ago period, dragged down by the poor performance of the manufacturing sector, particularly capital goods.

The capital goods sector contracted by 18.6% during the month, against a robust growth of 57.9% in January, 2010.

Nomura said it expects the growth momentum to be higher on account of robust consumption demand (including from the rural sector), resurgence of exports and a pick-up in credit growth.

"Overall, having experienced a sharp recovery in 2010, we expect the economy to enter a period of consolidation," it said.

The projections by Nomura are in line with that of global rating agency Standard & Poor's, which said growth would moderate to 8-8.5% in 2011 from 8.6% in the previous year.

On inflation, Nomura said the March-end figure would remain a tad above the RBI projected level of 8%. The overall inflation in February was 8.31%.

"We expect headline WPI inflation to average 8.1% YoY in 2011, on high food, oil and other commodity prices... Inflation is likely to remain above the RBI's comfort zone, prompting another 50 basis points of rate hikes," it said.

The report said overall inflation pressure would remain intense due to rising business input costs, among other factors.