Mumbai: India’s wider fiscal deficit will boost funding costs and weaken investor confidence, leading to more capital outflows, Moody’s Economy.com said on Wednesday, a day after the government unveiled a third stimulus package.
On Tuesday, India slashed factory gate duties and service tax to boost slowing growth, prompting Standard & Poor’s to cut its outlook on the country’s long-term sovereign credit rating to negative from stable.
“Although the tax cuts will inject much needed support into the economy, they may heighten concerns about the country’s already large public debt,” Sherman Chan, an economist at the Sydney-based office wrote.
“The alarming fiscal position will put upward pressure on funding costs...investment growth is set to slow notably this year,” added Chan, who expects the rupee to trade around 49 per dollar until mid-2009.
The Reserve Bank of India (RBI) is also expected to continue reducing its main lending rate to 4% or lower in the coming months, she added in the note.
India’s gross domestic product (GDP) data for the three months to December 2008 is due on Friday, which Chan expects will slow to 6.1%. The economy grew 7.6% in the September-quarter, government data showed.
Moody’s Economy.com forecasts further slowdown in the March quarter and puts the economy’s annual growth in FY09 at 6.8%, lower than 7.1% projected in the interim budget released on 16 February.