On the backdrop of higher crude prices and fragile coalition at the Centre, Standard Chartered Bank on Tuesday revised downward GDP growth forecast lowered to 7.1 percent in the next financial year from 7.4 percent estimated earlier.
Similarly, inflation forecast has been revised to 7.2 percent for FY13 from 6.5 percent projected earlier, the report added.
“We revise down our growth forecast to 7.1 percent for FY13 on relatively restrictive monetary policy and higher inflation,” the research report said.
The government has pegged FY13 growth at 7.6 percent, and a fiscal deficit of 5.1 percent.
On inflation, the report said lack of supply-side reforms along with higher crude oil prices will drive average inflation rate for the next financial year to 7.2 percent.
“We now expect WPI inflation to average 7.2 percent in FY13,” it said.
The report also said the recent hike in the excise duty by two percent to 12 percent would also add to the inflationary pressure.
“The recent hike in the excise duty by 2 percent to 12 percent should also add to inflationary pressure, especially in manufactured product prices. This along with 20 percent increase in railway freight rates announced just before the Budget, should push prices higher,” the report said, adding this will constrain the Reserve Bank for substantial reduction in policy rates.
“Against this backdrop, we now think RBI will be able to cut rates by only 75 bps (0.75 percent) in FY13, compared with our earlier forecast of 150 bps (1.5 percent).
The repo rate is currently at 8.50 percent, and we expect it to be at 7.75 percent by the end of FY13,” the report said. Referring to current account deficit, the report said current account deficit is likely to be at 3.3 percent of GDP against 3.1 percent projected earlier.
The research report also revised down its balance of payment (BoP) forecast to $ 5.5 billion from $ 10.5 billion estimated earlier.
About possible impact of higher inflation and government borrowing on G-Sec yields, the report said yields would be higher with significant lower duration gains.
“The announcement of the government’s FY13 market borrowing and our revisions to inflation and policy rate forecasts, have implications for our G-Sec yield forecasts.
“We revise up our G-Sec yield forecasts and now expect significantly lower duration gains from G-Secs,” it said.