India growth points to rate rise, less stimulus

It also backed the market view that the government could announce steps to unwind its stimulus measures in the annual 2010/11 budget presentation on Feb. 26 as a recovery in Asia's third-biggest economy shows a more solid footing.

Markets have already priced in expectations for a rise in interest rates and the estimate on Monday did little to change that. At 12:41 p.m. (0711 GMT), the yield on the benchmark 10-year bond was at 7.66 percent, below Friday's closing of 7.68 percent.

Still, Rajiv Kumar, chief executive of ICRIER, a Delhi-based think-tank, said the Reserve Bank of India (RBI) would watch the budget before making a decision on interest rates.

"The RBI will probably watch the government action on the stimulus exit in the budget before taking a call on interest rates," he said.

The official forecast released on Monday was largely in line with other estimates that point to an economy picking up after growth weakened to a six-year low of 6.7 percent in 2008/09.

The economy has rebounded quickly with data showing strength in industrial output, although a damaging drought has hit the agricultural sector.

The Congress Party-led government introduced various stimulus measures during the downturn, including more relaxed repayment schedules for export credit.

It has tried to reassure Indians that it would not do anything to jeopardise growth in withdrawing its stimulus. But analysts say that with the economy recovering, it is treading a thin line between supporting the economy and inflaming inflation.

In addition, reduced spending would help eat into its 2009/10 fiscal deficit, which is at a 16-year high of 6.8 percent of GDP.

The Reserve Bank of India (RBI) has already raised bank reserve requirements as it starts to withdraw its crisis measures and it has warned of mounting inflation pressures, setting the stage for rates to rise.

BREAKDOWN