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Crisil slashes India's GDP forecast to 5.5%

July 26, 2013 08:17 IST

Image: Foreign skiers travel in cable car gondolas in Gulmarg.
Photographs: Danish Ismail/Reuters

Rating firm Crisil revised downwards its GDP growth forecast to 5.5 per cent this fiscal from its earlier estimate of 6 per cent, citing reduced likelihood of monetary easing going forward due to falling rupee.

"We have lowered GDP forecast for FY 2014 by 50 basis points to 5.5 per cent, given the reduced likelihood of interest rate cuts and weak momentum in both industry and services," Crisil Research President Mukesh Agarwal said.

In backdrop of the recent measures by RBI to absorb liquidity from the system to contain rupee volatility, Crisil said there is significantly diminished probability of a repo rate cut during the remaining part of the current fiscal.

Besides ADB, several brokerages like Nomura, BofA-ML, Deutsche Bank had last week lowered their GDP growth forecast and pegged it between 5 and 5.8 per cent.

A Crisil report said challenges faced by Asia's third largest economy are mainly domestic as the global environment is more stable now than in 2009.

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Crisil slashes India's GDP forecast to 5.5%

Image: RBI Headquarters.
Photographs: Reuters

RBI has come out with a slew of steps to squeeze liquidity out of the system to stabilise rupee, during hit a record of low 61.21 on July 8.

The rupee is the worst performing Asian unit this year, losing close to 10 per cent against the US currency this fiscal alone.

The rating agency, however, maintained its rupee level against the dollar at 56 on the back of net foreign inflows into the country.

RBI's measures will push up the inter-bank rates, impacting the cost of borrowing for banks, which in turn is likely to affect lending rates in the future, it said.

"These measures will push up the borrowing costs for banks. So, there is now little possibility of easing of lending rates in 2013."

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Crisil slashes India's GDP forecast to 5.5%

Image: Employees pack auto components at the factory in Noida.
Photographs: Adnan Abidi/Reuters

Even if these measures are reversed later in the year, any cut in the repo rate will become difficult with headline inflation likely to rise in coming months due to a weak rupee, the rating outfit maintained.

The report pointed out the lowering of GDP forecast for both the eurozone countries and the US will adversely impact the Indian economy.

The rating agency didn't revise its inflation forecast for this fiscal and retained it at 5.3 per cent, but added that the depreciating rupee remains an upside risk to inflation.

On fiscal deficit, Crisil said the revenue-expenditure gap will be marginally up to 5.2 per cent from 5.1 projected earlier. The Government has set a target to bring down the deficit to 4.8 per cent of GDP in FY14 from 4.9 last fiscal.

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Crisil slashes India's GDP forecast to 5.5%

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Photographs: Kham/Reuters

Interestingly, the current account deficit (CAD) is likely to be lower at 4.2 per cent, as per Crisil, against 4.5 per cent projected earlier due to lower non-oil imports, especially gold.

"While we expect lower CAD in FY14, the country will still need foreign capital inflows of around $81 billion to fund the CAD this fiscal. We estimate that the recent RBI measures and future actions by the government will result in net inflows of USD 76 billion," the agency said.

The report said credit quality of corporates is likely to be weakened by slow growth in GDP, heightened currency volatility and higher-than-expected interest rates.

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Crisil slashes India's GDP forecast to 5.5%

Image: A mechanic dismantles the engine of a car at a workshop in Noida.
Photographs: Parivartan Sharma/Reuters.

"Specifically, stress will increase in sectors such as power, construction, engineering and steel, and lead to higher non-performing assets (NPAs) in the banking system."

It said the falling rupee, coupled with weak systemic liquidity, will increase refinancing pressure on companies.

On banks, the report said it expects NPAs to increase to around 4 per cent of advances by the end of the fiscal from 3.3 per cent a year ago.

On the auto sector, the agency said it sees car sales declining 2-3 per cent, while that of medium and heavy commercial vehicle 1-3 per cent in 2013-14.

It also sees stress on the realty front and lowered growth for the sector, saying "we are lowering growth in new home sales by 400 bps and volume growth for steel and cement sector by about 100 bps". 

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