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Manufacturing sector to be hit by slowdown for some more time, it says. A survey conducted by the Reserve Bank of India (RBI) has estimated that the Indian economy would grow at less than 6 per cent during the current financial year, the slowest expansion since 2002-03.

The median forecast of professional forecasters’ survey estimated that the economy would grow by 5.7 per cent during the current financial year and also revised the growth projections for 2008-09.

According to the Central Statistical Organization’s advance estimates, GDP is projected to grow by 7.1 per cent in 2008-09. This would be the slowest growth since 2002-03, when the economy grew by 4 per cent. For three successive years up to 2007-08, GDP rose at a rate of over 9 per cent.

Agriculture, which is projected to grow at 3 per cent during the current financial year, provides a silver lining of sorts with services and industrial growth expected to moderate.

During the current financial year, imports and exports are projected to contract by 4 per cent and 8.4 per cent respectively. This indicates that the manufacturing sector would continue to feel the impact of the global slowdown for some more time.

The only good news is that there are signs of the economy bottoming out. During April-June, the GDP is expected to rise by 5.3 per cent, before improving to 5.6 per cent in the second quarter. The Indian economy is expected to grow at 6.2 per cent in the third and 6.5 per cent in the fourth quarters. During the third quarter of 2008-09, the Indian economy grew by 5.3 per cent as against 7.7 per cent in the first half.

While RBI expects inflationary pressure to remain low during the current financial year due to low commodity prices globally, it also points out that high food prices have kept consumer price inflation at elevated levels. During January-February, inflation based on consumer price indices has hovered around 9.6-10.8 per cent as against 7.3-8.8 per cent in June 2008.

Pointing to more pain for companies, the forecasters’ survey estimated the growth in corporate profit to fall to single-digit rates.

In addition, the quarter-ahead expectations survey on industrial performance conducted by RBI projected all-round deterioration during April-June 2009. Only 11.2 per cent of the respondents said that the overall business situation would be better and 8.4 per cent said the financial situation would be better.

“In sum, the Indian economy has experienced some loss of growth momentum with major drivers of growth witnessing moderation,” RBI said in its pre-monetary policy assessment today.

While savings and investment rates are expected to decline during 2008-09, RBI said the fiscal stimulus packages announced by it and the government would help arrest the moderation and revive consumption and investment with some lag. Besides, it said that the balance of payment position remained sustainable in the context of the present level of foreign exchange reserves and external debt.

Among the positives, the central bank, which is due to announce the annual policy statement for 2009-10 tomorrow, said that foreign exchange reserves continued to remain at comfortable levels, and would ensure stability, despite falling by $59 billion over the last 12 months.

The Reserve Bank of India cut its key short-term rates by 25 basis points each on Tuesday to shore up faltering growth in the face of the global economic slowdown.

The repo rate, at which the Reserve Bank of India infuses cash into the banking system, will be cut to 4.75 per cent, and the reverse repo rate, at which it absorbs excess cash from banks, will be reduced to 3.25 per cent, effective immediately.

The central bank cut is growth estimate for 2008/09, which ended on March 31, to 6.5 to 6.7 per cent, and forecast growth of around 6 per cent for 2009/10.

It said that managing large government borrowing in 2009/10 in a non-disruptive manner would be a major challenge, and said it would used a mix of monetary and debt management tools to ensure this was done smoothly.

“Large borrowings also militate against the low interest rate environment that the Reserve Bank is trying to maintain to spur investment demand in keeping with the stance of monetary policy,” the central bank said in its policy statement.

The bank rate, used by banks to price long-term loans, remained at 6.0 per cent. Banks’ cash reserve requirements were also left unchanged at 5.0 per cent.

Analysts polled by Reuters were almost evenly split over whether the central bank would cut rates or not. Six out of the 11 analysts polled expected the bank to bring down its lending rate by 25 to 50 basis points. The other five forecast the rate to be held steady.

The RBI has now cut its short-term lending rate by 425 basis points in six steps since Oct. 20 as the global economic crisis has hit Asia’s third-largest economy harder than expected. The central bank said wholesale-priced based inflation was expected to turn negative early in the current fiscal year, but this should not be interpreted as deflation for policy purposes.

It projected WPI inflation would be around 4 per cent at the end of 2009/10.

The central bank said a planned April 2009 review of the policy on foreign banks in India would now not go ahead until there was greater clarity regarding stability, recovery of the global financial system and better global coordination on regulation and supervision.

Banks to consider lowering lending rates in a few days.

Less than a week after third-quarter GDP estimates showed a lower-than-expected 5.3 per cent growth rate, the Reserve Bank of India on Wednesday surprised the market and sent fresh signals to banks to lower lending and deposit rates by pruning the repo rate and the reverse repo rate by 50 basis points each.

The repo rate, or the rate at which RBI lends to banks, has been cut to 5 per cent, while the reverse repo rate, or the rate at which the central bank absorbs liquidity, has been pared to 3.5 per cent. The market had given up hopes of an immediate reduction after the central bank prodded banks last week to lower rates.

Around the time the central bank announced its latest move to boost economic activity, Canara Bank said it would cut interest rates on housing and vehicle loans and domestic term deposits, effective March 11.

Others banks, however, said their asset-liability committees (alcos) would meet over the next few days to examine the cost of funds and then decide whether to reduce lending rates.

“Wednesday’s move is prompted by the fact that inflation is coming down and there is a possibility that the numbers may go down to negative territory in June. We expect the cost of funds to drop in a fortnight. When the cost of funds comes down for us, we will pass on the benefit to borrowers,” said HDFC Vice-Chairman and Managing Director, Keki Mistry.

An Axis Bank executive said that the bank would review its home loan rates soon but did not comment on the prime lending rate.

“This is a signal from RBI to review the rates. Our alco will meet in three or four days to take stock of costs and then decide the issue,” Bank of Maharashtra Chairman and Managing Director Allen C A Pereira said.

“RBI has sought to create conditions conducive to consumption and investment, taking into account global developments and their impact on India: a slowdown in growth on one hand and decline in inflation on other,” said ICICI Bank CEO-designate Chanda Kochhar.

The RBI move is largely a sentiment booster for banks rather than a technical one, as banks already have ample liquidity and hardly borrow from the repo window right now, she added.

A cut in reverse repo rates will discourage banks from parking surplus funds with RBI through the liquidity adjustment facility and encourage them to boost lending to the commercial sector. Over the past three months, RBI has slashed the rate 250 basis points.

With the latest repo rate reduction, the fifth since October 20, the overall cut since the global credit crisis intensified adds up to 400 basis points.

Since September, the central bank has also lowered the cash reserve ratio, or the proportion of deposits that banks set aside, by another 400 basis points to inject Rs 1,60,000 crore into the system. Through the series of measures, RBI has provided Rs 3,88,000 crore of primary liquidity to the system.

Banks have, however, refrained from passing on the entire benefits to borrowers and have reduced lending rates 50 to 200 basis points, with private and foreign banks being reluctant to cut rates.

As a result of banks’ risk aversion that prompted them to park larger sums of money in government securities, the flow of resources to the commercial sector from banks and non-banks fell to Rs 4,98,136 crore between April and February 13, against Rs 6,08,351 crore in the corresponding period of the last year. On a year-on-year basis, non-food credit growth, which rose to 29.4 per cent on October 10, decelerated to 19.7 per cent on February 13.

RBI, while advising banks to “monitor their loan portfolio and take early action, to prevent asset impairment” also asked lenders to appropriately price the risk “and ensure that creditworthy enterprises continue to get funding”.

Overall economic activity has slowed, with the economy projected to grow 7.1 per cent this year, against over 9 per cent during the past three years. Industrial output contracted in December, exports have shrunk for four months in a row and growth in the services sector has slowed.