Crisil Research has cut India’s real GDP growth forecast for 2012-13 from 6.5 per cent to 5.5 per cent. This downward revision in GDP is due to deficient monsoon and worsening of the Euro Zone economic outlook.
The revised growth forecast does not take into account any substantial fiscal stimulus that may be provided to the economy to arrest and reverse a growth slowdown.
Despite slowing growth, the research arm of credit rating agency Crisil has revised the average wholesale price index (WPI) based inflation forecast for 2012-13 to 8 per cent from 7 per cent.
The revision in inflation reflects the higher-than-anticipated increase in food inflation. The flaring up of food inflation will, however, raise inflationary pressure.
Also, a weak rupee will continue to offset the gains from lower global crude oil, commodity and metal prices, and keep the cost of imported items high.
On the flip side, lower GDP growth in both India and the Euro Zone will result in a decline in manufacturing inflation.
Fiscal deficit
With lower GDP growth, government revenue growth too will be lower than estimated earlier, which pushes Crisil Research’s fiscal deficit forecast to 6.2 per cent from the earlier forecast of 5.8 per cent of GDP.
Given the higher fiscal deficit and, consequently, higher government borrowings, the pressure on the 10-year Government Security yield would remain high.
10-year Government Security
Crisil Research expects the yield on the 10-year security at around 8.0-8.2 per cent by March-end 2013, even if the repo rate is cut by 75-100 basis points by the RBI during the rest of the fiscal year.
The repo rate (the interest rate at which banks borrow funds from the Reserve Bank of India) currently is at 8 per cent.
The rupee’s appreciation against the dollar from the current levels to around $53 per dollar by March-end 2013 would be supported by easing of the current account deficit in 2012-13 to nearly 3.1 per cent of GDP from 3.6 per cent estimated earlier.
Lower import growth due to a fall in India’s GDP growth as well as softening of international oil prices would reduce the import bill.
India will continue to remain attractive to foreign investors due to attractive valuations of Indian equity markets because of the sharp rupee depreciation and correction in equity prices; and the over 400 basis points growth rate differential that India will maintain with the West, despite growth slowdown.