GDP forecast at 5.8% in 2011:HSBC

HSBC revised up their forecast from 5.2% due to recent high frequency number for retail sales and industrial productions.

According to HSBC, growth is expected to hold up in the coming quarters but the expansion will take place at a more sustainable speed. However, exports suggest the slowdown may not be as strong as initially thought.

Relative to last year, the slowdown is mostly driven by the smaller contribution from net exports and a drawdown in inventories as the global restockng cycle has already come to an end. These factors are expected to reverse in 2012 with the recovery in global growth. This will also lift private domestic demand and raise GDP growth to an upwardly revised 6.2% in 2012.

However, inflation has been on the rise, initially due to higher costs of accommodation and politically engineered higher prices on cars. Inflation has more recently become more broad-based as capacity remains tight and has raised demand-led price pressures. This will prevail even as growth eases to a more sustainable pace. Higher energy costs will also add to inflation, including through its second-order impact. In light of this, we have revised up our inflation forecast.

This also calls for further monetary policy tightening and we expect a re-centering of the exchange rate band at the upcoming policy meeting in April. Fiscal policy could also turn out tighter than budgeted given the conservative budget assumptions underlying the 2011/12 budget.