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ADB, Bofa-Merrill Cut India Growth Forecast

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Bank of America-Merrill Lynch cut India's fiscal year 2013-14 growth forecast to 5.5 per cent of the gross domestic product from 5.8 per cent after the central bank took steps to curb rupee liquidity, it said in a note on Tuesday. The Reserve Bank of India announced measures late on 15 July to curb the rupee's decline by tightening liquidity and making it costlier for banks to access funds from the central bank. The investment bank said the tightening will push back lending rate cuts.

"We had earlier expected growth to stage a shallow recovery to 5.8 per cent on the back of better rains and lending rate cuts. We have now removed the 30 basis points we had expected from softer rates," wrote analysts at the bank.

Earlier today (16 July) an Asian Development Bank (ADB) report said slow progress of economic reforms is expected to pull down India's growth to 5.8 per cent in the 2013 calender year from 6 per cent projected earlier.

"In India...slow progress in pushing through the reforms needed to ease business bottlenecks means growth is likely to be 5.8 per cent this year, slower than the previously forecast 6.0 per cent," the report 'Asian Development Outlook Supplement' said. Finance Minister P Chidambaram in Jaipur has said on 16 July that India was likely to clock over 6 per cent growth in the financial year 2013-14, in the backdrop of government taking host of steps to boost sagging economy. India's growth fell to a decade's low of 5 per cent in fiscal 2012-13.

ADB in April had projected a growth rate of 6 per cent for India in 2013. It further said the projected growth at 5.8 per cent in 2013 will be "higher than the 5.0 per cent posted in 2012, growth remains constrained by supply-side bottlenecks, as reflected in the continued slowdown in fixed capital formation, weakness in the industrial sector, and sluggish progress in pushing through badly needed structural reforms."

The growth rate, it added, is expected to accelerate in 2014 as slower inflation provides some scope for monetary easing that could boost investment and consumption.

"Growth will be further boosted by pre-election spending, and the pickup in US growth will support Indian tech companies and related service sectors", ADB said, adding, the US was likely to grow at 2 per cent in 2013 and 2.6 per cent in 2014.

Elsewhere in South Asia, it said, Sri Lanka will continue to grow strongly, while other parts of the region will see softer-than-anticipated growth. South Asia, it said, is expected to grow by 5.6 per cent in 2013 and 6.2 per cent in the following year.
Asia In Trouble?
The bank lowered its growth forecast for developing Asia by 0.3 per centage points to 6.3 per cent in 2013 and 6.4 per cent in 2014, the Manila-based development lender said in a supplement to its Asian Development Outlook 2013 first released in April.

It cut its growth estimates for China by 0.5 per centage points to 7.7 per cent and 7.5 per cent this year and the next, with data showing investment growth slowed in May and is expected to weaken further with financial institutions becoming more averse to risk following turbulence in its domestic interbank money market.

"The drop in trade and scaling back of investment are part of a more balanced growth path for the PRC (People's Republic of China), and the knock-on effect of its slower pace is definitely a concern for the region," ADB Chief Economist Changyong Rhee said in a statement. "We are also seeing more subdued activity across much of developing Asia," he said.

China reported on Monday (15 July)  that annual GDP growth slowed to 7.5 per cent in April to June - the ninth quarter in the last 10 that expansion has weakened - putting pressure on Beijing to quicken reforms rather than slow them to take up the economic slack.

Southeast Asia's growth is expected to be slightly lower than previously expected, mainly due to softer demand from China. However, the sub-region as a whole is likely to buck the regional trend of softer-than-expected price pressures largely due to 44 per cent jump in subsidized oil prices in Indonesia in June.

Offering some comfort for central banks, the ADB forecast inflationary pressures would be benign due to decelerating growth in the region and on continued weakness in commodity prices due to soft global demand.

The ADB also said it expects Japan's recovery to pick up speed as the effects of "Abenomics" take root and improving corporate profits bolster household income and business environment. It forecast growth in Japan this year of 1.8 per cent, against an April estimate of 1.2 per cent.