India Economics

SGlobal growth environment continues to deteriorate

Global growth has continued to surprise on the downside. The vicious feedback loop of first round of increases in credit defaults causing risk aversion in the financial system and further growth slowdown continues in the many of the Anglo-Saxon countries. Capital inflows will remain weak for longer

Higher capital flows have been the anchor of a self-fulfilling virtuous cycle of an appreciating exchange rate, lower interest rates, and strong domestic demand growth. We believe a weak global environment and credit defaults in the developed world will mean continued risk aversion, thus affecting capital inflows trend in 2009. Payback from India’s own credit cycle excesses

To the extent to which banks were aggressive in disbursing credit at unusually low rates to marginal borrowers at cycle peak GDP growth, they are witnessing a rise in non-performing loans. This would make banks risk averse to lend, resulting in a vicious slowdown. We expect credit growth to slow to 10 percent YoY over the next six to eight months. Domestic demand shock larger than expected Weak capital inflows have reduced access to international funding for corporates, and risk aversion in the domestic financial system will slow loan growth. We expect investments to contract in 2009 on account of this poor financial market environment and poor business sentiment. Private consumption will suffer due to tightening in lending norms and a weakening job market. Reducing 2009 growth estimates

Building in weaker domestic as well as external demand, we are cutting our GDP growth estimate for 2009 again to 4.3 percent from 5.3 percent. We expect recovery in 2010 to 6.1 percent, in line with global growth trend.