India growth prospects positive despite rate hike

India's government said Wednesday that the country's economic growth outlook was "positive" despite a fresh round of monetary tightening by the central bank to tackle high inflation.
Inflation in Asia's third-largest economy rose to a 13-year high of 11.05 percent in the week ended June 7, well above the RBI's declared comfort level of 5.5 percent.
"These steps are necessary in the face of rising inflation due to relentless increase in crude oil prices," the finance ministry statement said, adding the Reserve Bank of India needed to "moderate and manage aggregate demand."
On Tuesday the central bank raised its repo rate at which commercial banks borrow funds from the central bank to 8.5 percent from 8.0 percent with immediate effect.
It also announced a two-stage hike of the cash reserve ratio, or the amount of cash banks must hold in reserve, by 25 basis points to 8.50 percent effective July 5, and by another 25 basis points to 8.75 percent on July 19.
"The policy stance adopted by the RBI should boost the confidence of investors both domestic and foreign, and augur well for economic growth," the finance ministry statement added.
Price rises have overshadowed better-than-expected growth of 9.0 percent in the last fiscal year.
Economists expect growth to slow this year to around 7.8 percent on higher borrowing costs and tough global financial conditions. The prime minister has projected growth of over eight percent.
Goldman Sachs said it expected "a tightening bias in monetary policy to continue."
"We think that the RBI will wait and watch inflationary trends over the next several weeks, particularly signs of pass through to broad based inflation and broad money growth, before raising rates again," said Tushar Poddar, vice president of Asia economic research for Goldman Sachs.
"We do not think the rate hike will have a large negative impact on growth," he added, but cautioned there were "downside risks to our GDP growth forecast of 7.8 percent" for the current year.
But India's main business lobby group, the FICCI, warned businesses were feeling the pinch.
"Indian industry has been subjected to successive rate hikes over the last one and a half years. These have substantially pushed up the interest cost for industry particularly in the face of acute international competition," it said.