2012-02-11 18:21:01 - New Country Reports research report from Business Monitor International is now available from Fast Market Research

Core Views India's cyclical growth slowdown is likely to be deeper and more protracted than previously expected given the higher cost of capital and deterioration in global external conditions. We have downgraded our real GDP growth forecasts for FY 2011/12 and FY 2012/13 (April- March) to 7.4% (from 7.6%) and 7.5% (from 8.2%) respectively. This outlook puts us firmly below consensus. The RBI's Survey of Professional Forecasters on Macroeconomic Indicators in August put median expectations at 7.9% and 8.3% for FY 2011/12 and FY 2012/13 respectively. The major motivation behind our long-held bearish stance towards the Indian rupee has been the country's increasing overreliance on short-term portfolio inflows to fund its current account shortfall. In line with this view, the

rupee has been one of Asia's worst performers in H211, and we expect currency gains to be limited in 2012 (as reflected in our average forecast of INR 47.00/US $). India's recent efforts towards fiscal consolidation have proven to be largely illusory. Faced with a slowing economy and in the absence of major one-off windfalls, the government's nominal fiscal balance in FY 2011/12 will come in wide of the mark, with FY 2012/13 unlikely to prove much better. We are pencilling in central government deficits worth 5.8% and 5.5% of GDP in FY 2011/12 and FY 2012/13, and accordingly, we believe it to be only a matter of time before the authorities admit defeat and downgrade their current targets of 4.6% and 4.1%. Major Forecast Changes We have raised our end-FY 2011/12 policy rate forecast to 8.25%, albeit we can no longer rule out one last hike in the current tightening phase. For FY 2012/13, we expect the Reserve Bank of India (RBI) to cut rates by 50 basis points once headline inflation cools in a bid to revive economic activity. Key Risks To Outlook Downside Growth Risks From The External Environment: Should we see a combination of a US double-dip recession, an intensifying eurozone sovereign debt crisis and/or a Chinese hard landing, India growth could well fall below the 7.0% mark. Upside Long-Term Growth Risks From Structural Reforms: Should the government successfully embark on reforms - particularly to investment regulations in the retail and insurance sectors - we may see a sustained increase in FDI , boosting longer-term growth. This is not our core scenario.
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