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India slowing down sharply: Moody's

India's economy is likely to grow at 6.5% by mid-2012 from a growth of 7.8% year on year (YoY) in the first half of 2011, predicts Moody's Analytics, a division of the global rating agency Moody's. The agency is calling the engineering of a monetary policy led slowdown to fight inflation as a ‘failure'.

Inflation has been identified as the main problem with the wholesale price index registering a 9.7% annual growth in September 2011.

The agency says that policymakers have been engineering a monetary policy-led slowdown in response to an elevated inflation through the first half of 2011. Yet so far, the Reserve Bank of India's 325 basis points' worth of tightening must be judged a failure, the Moody's statement says.

"India presents a more serious cause for worry," says Glenn Levine, Senior Economist, Moody's Analytics. India's policymakers are expected to further tighten interest rates.

Domestic demand has been hit hard with a 12-month downward trend in industrial production. "India's industrial sector is geared chiefly to the domestic economy, and the sharp slowdown in consumer durables production confirms household spending is slowing sharply," Glenn Levine added.

Output of capital goods is softening in response to weak corporate demand.

Asian giants weaker

The International Monetary Fund's latest report on Asia revised forecasts downward, while several of the region's central banks shifted from tightening mode towards a more neutral stance. But, Moody's still expects solid growth over the next 12 to 14 months.

China's economy is also slowing, as the Business Climate Index and the Entrepreneur Confidence Index, two major sentiment gauges, both eased to 133.4 and 129.4, respectively, in the September quarter. Inflation continues to ease, with September CPI growth at 6.1% y/y and producer prices up 6.5%.

While the emerging Asian economies are a growing concern about the effect of weaker external demand on local output, Bank Indonesia became the first central bank in the region to loosen policy, announcing a cut in its benchmark policy rate from 6.75% to 6.5%. CPI inflation is 4.6% y/y, down from 7% earlier in the year.

Regional implications

"China's economy will help keep growth in the Asia-Pacific region ticking. But if China and India, the region's two emerging giants, were to slow more than expected, much of the region could be pushed into recession," says Glenn Levine.