Global financial services firm Nomura has lowered India's GDP growth forecast for the current financial year to 4.2 per cent from 5.5 per cent earlier and kept a "negative" view on the country's macro-economic outlook for the next three to six months.
According to Nomura, downside risks to the growth outlook have materialised with financial conditions tightening much more than anticipated.
"We are cutting our real GDP growth estimates to 4.2 per cent y-o-y in FY'14 from 5.0 per cent earlier. We will publish more details in a separate note. We retain our negative view on India's macroeconomic outlook for the next three to six months," Nomura India's Sonal Varma said in a research note.
According to official figures, the country's economic growth in the April-June quarter slid to 4.4 per cent, the lowest in past several years, pulled down by drop in mining and manufacturing output.
This prompted the industry to demand coordinated action by the government and the RBI to boost the economy.
"Looking ahead, good monsoons and a gradual recovery in global demand are positives, but the question is whether they will be able to offset the drag from the ongoing balance of payment (BOP) stress," Nomura said.
According to Nomura, the BOP pressures are likely to continue over the next three to six months, which would have an adverse impact on the economy through multiple channels like cost-push inflation, higher short-term funding costs, asset price volatility and falling confidence, among others.
Moreover, with fiscal pressures building, the government will likely be unable to continue its current pace of spending without risking substantial fiscal slippage, implying spending will have to be sliced in the second half of FY 2014.
"Hence, the risk of a pro-cyclical fiscal and monetary policy tightening is rising and the downside risks to our growth outlook have materialised with financial conditions tightening much more than anticipated," the report said.
Meanwhile, the pressure on the growth momentum is likely to pose greater challenges for policy makers as they try to stabilise the falling currency, which had touched an all-time intra-day low of 68.85 to a dollar on August 28 and is currently hovering around the 66/USD mark in highly volatile trade.