Rising inflation, a pick up in demand for manufactured goods and high fiscal deficit will throttle any chance of a rate cut in India despite a lower government estimate of economic growth, analysts say.

"Inflation is rising and that's a cue to the markets that there may not be another rate cut," Indranil Pan, associate vice president with Kotak Mahindra Capital Company, said on Tuesday.

India said on Friday its economy, the third largest in Asia, would grow 4.4 per cent in the current financial year ending March -- one of the slowest rises since the country launched reforms in 1991.

Economists had expected a slower 5.1 per cent growth due to the worst drought in 15 years after the economy grew 5.6 per cent in the last financial year.

"The estimates show that the downturn in the farm sector is not having a significant impact on industry, the interest-sensitive component of growth," said Sanjay Mathur, Singapore-based regional economist with UBS Warburg. "If the current momentum remains in the industrial sector, monetary policy can remain neutral."

The government said growth was expected to be hit by a 3.1 per cent contraction in the farm sector, after rising 5.7 per cent in the previous year.

But it forecast the services sector, the engine for economic growth in the last few years, to expand 7.0 per cent from 6.8 per cent and manufacturing to grow 6.1 per cent from 3.4 per cent.

Robust demand for manufactured goods and rising energy prices drove domestic inflation to 4.61 per cent on January 25 from 3.34 per cent a month ago and 2.89 per cent three months back, souring hopes of an expected rate cut.

Rising inflation

India, which imports nearly 70 per cent of its oil, is worried a war in Iraq could further push up domestic energy prices.

Yields on Indian government bonds are already pricing in the risks with the 10-year benchmark bond at 6.46 per cent in Tuesday, up from a lifetime low of 5.82 per cent on January 15.

At the lowest, the yield had fallen nearly 450 basis points over the past two years helped by central bank rate cuts.

But on Monday, Bank of Baroda, a leading state-run bank, cited rising bond yields to hike its deposit rates.

Other banks have adopted a wait-and-watch stance though traders believe rates may have bottomed out with the government expected to borrow heavily in the next financial year to bridge a stubbornly high fiscal deficit.

"It will be difficult for the market to hold on to these levels with or without rate cuts if the economy gathers pace," said Sanjeet Singh, analyst at ICICI Securities and Finance.

Recovery

A quarterly study by the Federation of Indian Chambers of Commerce and Industry found 60 per cent of 521 companies surveyed expect their industry to perform better in the next six months.

"It is surprising to see the government's growth estimate when business confidence surveys are pointing to a positive sentiment," said Ajit Ranade, chief economist with ABN AMRO Bank.

India's economy expanded over seven per cent in the 1990s when the country embraced free market reforms, up from nearly three decades of 3.5 per cent growth.

Economists say the country needs double-digit growth to eradicate poverty. But rating agencies say unless India lowers its high fiscal deficit, targeted at 5.3 per cent of GDP in 02-03, a double digit growth would be difficult to achieve.