India's growth may temper to 7%, rate hikes to go on: Deloitte

The Reserve Bank of India is expected to continue with the rate hikes until inflation comes down to around 6 percent, while economic growth could temper to as low as 7 percent, according to a report by leading consulting firm Deloitte.

"Inflation is unlikely to subside in the near term, and the Reserve Bank of India will probably continue raising interest rates until inflation stabilizes around 6 percent," said the Deloitte global economic outlook third-quarter report released Thursday.

"Costlier credit could also lead to a drop in investment activity through the year. Consequently, GDP growth for the current fiscal year could be as low as 7 percent," it added.

Inflation, based on whole sale prices, was recorded at 9.22 percent in July, while latest data released showed that food inflation had risen over double digits, at 10.05 percent for the week ended Aug 20.

The report added that unless India's fiscal situation improved, it is unlikely that its economic challenges will be alleviated in the coming year.

The first quarter of the current fiscal saw gross domestic product (GDP) increasing the slowest in six quarters at 7.7 percent. The government has targeted 9 percent growth  in 2011-12.

The report also said that the department of industry policy, under the commerce and industry ministry, had prepared a draft proposal for allowing 51 percent foreign direct investment (FDI) in multi-brand retail.

FDI in the retail sector is likely to improve distribution networks and supply chain efficiencies and over time help reduce food inflation, the consultancy said.

High inflation coupled with global economic uncertainty are some of the key challenges faced by the Indian economy in the current fiscal.

"There are concerns on the fallout of global uncertainty on the domestic economy and the success of India's'growth story," said Anis Chakravarty, director Deloitte Haskins and Sells.

"The central bank stressed that its primary concern is price stability and that it is willing to sacrifice growth in order to rein in inflation. Couple this with India's fiscal and current account deficit quandaries and the country's economic problems seem to magnify," he added.

The government's oil subsidy bill alone is likely to the tune of Rs.1.2 trillion (Rs.120,000 crore) this fiscal, while it is expected to suffer a loss in customs and excise duties worth Rs.490 billion (Rs.49,000 crore).

"To compound matters, the rise in the price of diesel, kerosene and cooking gas is likely to stoke inflation," said the Deloitte report.