Macquarie slashes India’s growth outlook to 5.3%

Global financial services firm Macquarie Securities today lowered India's GDP growth forecast for the current 2013-14 financial year 5.3 per cent from the 6.2 per cent it had estimated earlier, citing significant capital outflows and rupee depreciation.

According to a Macquarie research note, significant capital outflows from India amid an environment of already weak growth and slow progress in policy reforms is weighing down 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.

Going forward, the country's GDP growth is likely to recover only gradually to 5.9 per cent year-on-year in the next financial year, 2014-15.

"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.

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

Other key factors for the downgrade include political uncertainty and slow reforms; and a continued slowdown in new project inflows delaying a capital expansion 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 the INR-USD rate averaging around 59 with a downward bias in FY14," Macquarie said.

The rupee has depreciated by more than 10 per cent in the last one month, having crossed the psychological level of Rs60 per dollar in June-end (See: Rupee hits a record low of 60.63 against dollar).

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

The RBI is scheduled to hold its first-quarter monetary policy review on 30 July. Industry has as usual been demanding a cut in key policy rate to boost economic activities, and even the government is known to be averse to the idea of any further rate hikes.