Mumbai: Brokerage CLSA cut its forecast for Indian economic growth to 6.7% for the current fiscal year from its earlier projection of 7.3%, as high interest rates take a toll, with policy inertia and corruption scandals hurting confidence.
Policy-making gridlock as the government is distracted by a series of corruption scandals and a fractious coalition has scared off investors and deterred approvals of projects needed to add capacity in an economy prone to overheating.
“These domestic factors have added to the adverse impact of global headwinds, and have taken a bigger toll on growth,” Rajeev Malik, an economist at CLSA in Singapore, wrote in a note.
“Unlike 2008, the problems now are largely homegrown with greater political inertia and lower flexibility for using fiscal and monetary policies to counter the economic moderation,” he added. He also lowered his forecast for GDP growth in fiscal 2013 to 6.3% from the prior 7.5% view.
On Thursday, the Reserve Bank of India governor said the economy is poised to miss the central bank’s growth forecast of 7.6% for 2011-12 ending in March. The government this month said it expected GDP to grow by 7.25 to 7.75% this year, down sharply from a February estimate of 9%.
The central bank, last week, opted to pause an aggressive tightening cycle that involved lifting rates 13 times since March 2010.
CLSA’s Malik expects monetary policy to start easing from January, with the RBI likely to ease interest rates by 100 to 150 basis points in the coming twelve months.
He also revised his fiscal deficit forecast for the year to around 5.5% of GDP from 5.2% earlier.
“All eyes will be on the federal budget for FY13 at the end of February. The government has little choice but to announce a credible fiscal consolidation plan and limit the fiscal deficit to around 5% of GDP,” Malik added.
India’s fiscal deficit is likely to breach the budgeted target by a full percentage point to 5.5% of gross domestic product in 2011-12, forcing New Delhi to borrow Rs35,300 crore more from the market, a Reuters poll showed in November.
Malik expects the rupee to plunge to around Rs58 to the dollar in 2012 due to an anticipated strong rebound in the US currency.
The rupee sank to a record low 54.30 to the dollar this month, down almost a fifth from its July highs, making it this year’s worst performing currency in Asia.
“The RBI’s recent measures to check speculation in the currency market and to boost capital inflows will help the INR but a strong USD rebound could easily cause Asian currencies, including the INR, to depreciate significantly,” Malik said.
RBI has recently taken a slew of measures to support the rupee, including putting curbs on speculative trading and raising quotas for foreigners to buy local debt.
“As always, INR will suffer more as India runs a current account deficit compared to surpluses by other economies,” he added.