Global rating agency Standard and Poor's on Thursday said high interest rates, along with a slowing global economy, will trim India's economic growth to 7.8 per cent in 2008-09.
The Indian economy is expected to be adversely affected by a surge in inflation fuelled by energy and commodity prices. Despite signs of growth slowing down from the last year, the Reserve Bank of India has already hiked interest rates twice in June to deal with inflationary pressures and may well do so again, S&P said in a statement.
Higher interest rates are expected to moderate growth even further. Subir Gokarn, chief economist, S&P (Asia-Pacific), said: "We expect the inflation rate to average 8.5 per cent to 9.0 per cent during 2008-09."
The food price scenario has improved somewhat, given comfortable levels of wheat stocks and expectations of a normal monsoon this year. However, high oil prices, strong input costs and a depreciating rupee continue to exacerbate inflationary and other pressures.
The rising inflation, a slowdown forecast in economic growth and turmoil in global financial markets have dampened investor confidence and led to foreign capital outflow.
This has led the rupee, which was already under pressure from a rising oil import bill, to depreciate as sharply this year as it appreciated in 2007.
India's current account deficit is expected to swell to about 2.6 per cent of the gross domestic product (GDP). The rupee should remain at about its current level for the major part of the current financial year, before appreciating to Rs 41-41.5 aganist a greenback towards the end of the fiscal year, as global market conditions become more stable and oil prices moderate.