Credit Suisse has lowered India's economic growth forecast to 5.3 per cent for this fiscal, down from 5.7 per cent projected earlier, citing larger than expected fiscal tightening.
The forecast is still higher than the 5% projection made recently by the Central Statistical Organisation (CSO).
"The larger than previously expected fiscal tightening has...led us to further reduce our GDP growth forecasts for the current fiscal year and next," Credit Suisse Research Analysts Robert Prior-Wandesforde said in a research note.
It has cut GDP growth forecasts for 2012/13 to 5.3 per cent (from 5.7 per cent) and for 2013/14 to 6.7 per cent (from 6.9 per cent).
These projections are still comfortably above the consensus projection, and Credit Suisse maintains a 7.5 per cent average growth expectation for fiscal year 2014-15.
The government has taken several measures since September 2012, and growth is likely to have bottomed out in the third quarter of FY'13 (October-December).
CSO had last week pegged the GDP growth for the fiscal at a decade low of 5 per cent.
The government, meanwhile, has unveiled a slew of reforms, including FDI relaxation in retail and aviation sectors to help spur growth, and partial de-regulation of diesel prices and rein in finances.
On policy interest rates, Credit Suisse said that bearing in mind that additional downside inflation surprises, the Reserve Bank is likely to go for a further 100 bps (0.1 per cent) of repo rate reductions this year, taking the key policy rate down to 6.75 per cent.
Credit Suisse expects a 25 bps (0.25 per cent) reductions at both the March 19 and May 3 RBI meetings, with a 50 bps cut in July.
According to the report, the anticipated scale of the fiscal tightening in 2013/14 and, to a greater extent, the second half of 2012/13 is larger than expected and accordingly
the GDP growth projections has been lowered.
It said the Budget 2013-14 is likely to "err on the side of prudence, incorporating a modest tightening of the underlying fiscal stance after a bigger squeeze in 2012/13".
This should help pacify the rating agencies as well as RBI, Credit Suisse added.
A Budget incorporating credible tightening measures will