CMIE prunes GDP forecast to 7.5 per cent

Mumbai-based independent economic research firm, the Centre for Monitoring Indian Economy (CMIE), has pruned its forecasts for the country's economic growth by a tenth of a percentage point, from 7.5 per cent to 7.4 per cent.

However, this is still higher than the seven per cent growth for fiscal 2009 predicted by many other economists.

The proposed increase in government borrowing and the hike in spending that should follow are likely to put some pressure on liquidity in the fourth quarter of 2009, according to CMIE. ''The government has sanctioned an additional Rs148,093 crore over and above the budget estimate.

The last quarter of the current fiscal is expected to see Rs35,000 crore of borrowing through dated securities. This projected increase is expected to keep up some pressure on liquidity during the next three months,'' it said in its latest report.

A substantial expected increase in government bond (treasury bill) floatation could also contribute to a tighter liquidity situation, the report, released on Monday, said, adding that the liquidity crunch witnessed by the Indian banking system seems to have ''eased off substantially'' following the ''swift and strong'' measures announced by the Reserve Bank of India on 2 January.

However it warned that ''conditions may tighten again in the coming months because of the proposed increase in government spending, and consequently borrowing.''

The Reserve Bank had, on 2 January, announced three major measures aimed at improving the liquidity in the system. These include a 0.50 per cent cut in cash reserve ratio (CRR) which took effect from January 17, and a one per cent reduction in the reverse repo rate with immediate effect, slashing it from 6.5 per cent to 5.5 per cent.

The growth forecast of the Reserve Bank of India, due this week, is also expected to downscale its growth forecasts. It currently projects growth at 7.5-8 per cent.