Global financial services firm Macquarie has lowered India’s growth forecast for this fiscal to 5.3 per cent from 6.2 per cent estimated earlier citing significant capital outflows and rupee depreciation.

According to Macquarie Securities, significant capital outflows from India amid an environment of already weak growth and slow progress in undertaking the much needed policy reforms are weighing down the potential growth.

“We are downgrading our FY’14 GDP growth forecast to 5.3 per cent YoY from 6.2 per cent YoY estimated earlier,” Macquarie Securities said in a research note.

Going forward, the country’s GDP growth is likely to recover only gradually to 5.9 per cent year-on-year in FY’15.

“India’s macro-environment is at a crossroads, facing headwinds from sharp capital outflows, rupee depreciation and high cost of capital, which can possibly reverse the gains realised on macro-stability indicators like inflation, current account deficit and fiscal deficit,” Macquarie said.

Capital outflows, rupee fall

According to Macquarie, the downward revision in India’s growth forecast was largely due to capital outflows and rupee depreciation which in turn increased the external stability risks and constrained the policy rate cuts.

Other key factors for the downgrade include political uncertainty and reform momentum; and a continued slowdown in new project inflows delaying a capex cycle recovery.

Macquarie believes the weakness in the rupee is likely to persist in the short to medium term.

“Assimilating the sharp depreciation of the Indian rupee against the US dollar since May, 2013 and continued dollar strength, we maintain our base case expectation of INR/USD averaging around 59 with a downward bias in FY’14,” Macquarie said.

The rupee has depreciated by more than 10 per cent in the last one month and crossed the psychological level of 60 per dollar in June-end and touched over 61-level last week.

Policy rate cut

On rate cuts, the report said that the sharp rupee depreciation and capital outflows will delay the lowering of policy rates by RBI until currency stabilises.

The Reserve Bank of India is scheduled to hold its first quarter monetary policy review on July 30. The industry has been demanding a cut in key policy rate to boost the economic activities.

(This article was published on July 18, 2013)
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