India's economy may grow at its slowest pace in a decade in the current financial year, according to forecasts by the finance ministry, which predicts inflation will slow enough to allow interest-rate cuts.
Asia's third-largest economy may expand about 5.7 per cent to 5.9 per cent in the year through to the end of March, less than an earlier estimate of as much as 7.85 per cent, the ministry said in a mid-year review given to parliament yesterday. That would be the smallest gain since the year to March 31, 2003, when gross domestic product grew 4 per cent.
The Reserve Bank of India, which decides on monetary policy today, has so far resisted calls from Finance Minister Palaniappan Chidambaram for lower rates, opting to keep the repurchase rate at 8 per cent to damp inflation in October while reducing the cash reserve ratio.
To revive confidence in an economy with one of Asia's worst-performing currencies this year, Prime Minister Manmohan Singh in recent months pushed through policy overhauls to allow more foreign investment in retail and curbed energy subsidies.
"Both fiscal and monetary policies, however, would need to be supportive to sustain investor confidence," the ministry said. A moderation in inflation that may commence in the January-March quarter and benign global commodity prices will "facilitate softening of the monetary policy stance of the RBI," it said.
Inflation at the end of March will probably moderate to 6.8 to 7 per cent and the budget deficit will be contained at 5.3 per cent of GDP, the finance ministry said.
Indian stocks declined as the government slashed the nation's economic growth estimate.
The Sensex has risen 25 per cent this year, headed for its biggest annual advance since 2009, as the government's policy announcements attracted foreign investors.
Overseas funds were net buyers of local stocks for a 21st straight day on December 13, taking net purchases in 2012 to US$22.2 billion, the most among 10 Asian markets tracked by Bloomberg, excluding China.