Rating firm Crisil on Thursday revised downwards its GDP growth forecast to 5.5% this fiscal from its earlier estimate of 6%, citing reduced likelihood of monetary easing going forward due to falling rupee.
"We have lowered GDP forecast for FY 2014 by 50 basis points to 5.5%, given the reduced likelihood of interest rate cuts and weak momentum in both industry and services," Crisil Research president Mukesh Agarwal said.
In backdrop of the recent measures by RBI to absorb liquidity from the system to contain rupee volatility, Crisil said there is significantly diminished probability of a repo rate cut during the remaining part of the current fiscal.
Besides ADB, several brokerages like Nomura, BofA-ML, Deutsche Bank had last week lowered their GDP growth forecast and pegged it between 5 and 5.8%.
A Crisil report said challenges faced by Asia's third largest economy are mainly domestic as the global environment is more stable now than in 2009.
RBI has come out with a slew of steps to squeeze liquidity out of the system to stabilise rupee, during hit a record of low 61.21 on July 8.
The rupee is the worst performing Asian unit this year, losing close to 10% against the US currency this fiscal alone.
The rating agency, however, maintained its rupee level against the dollar at 56 on the back of net foreign inflows into the country.
RBI's measures will push up the inter-bank rates, impacting the cost of borrowing for banks, which in turn is likely to affect lending rates in the future, it said.
"These measures will push up the borrowing costs for banks. So, there is now little possibility of easing of lending rates in 2013." Even if these measures are reversed later in the year, any cut in the repo rate will become difficult with headline inflation likely to rise in coming months due to a weak rupee, the rating outfit maintained.
The report pointed out the lowering of GDP forecast for both the eurozone countries and the US will adversely impact the Indian economy.
The rating agency didn't revise its inflation forecast for this fiscal and retained it at 5.3%, but added that the depreciating rupee remains an upside risk to inflation.
On fiscal deficit, Crisil said the revenue-expenditure gap will be marginally up to 5.2% from 5.1 projected earlier. The government has set a target to bring down the deficit to 4.8% of GDP in FY14 from 4.9 last fiscal.
Interestingly, the current account deficit (CAD) is likely to be lower at 4.2%, as per Crisil, against 4.5% projected earlier due to lower non-oil imports, especially gold.
"While we expect lower CAD in FY14, the country will still need foreign capital inflows of around USD 81 billion to fund the CAD this fiscal. We estimate that the recent RBI measures and future actions by the Government will result in net inflows of $76 billion," the agency said.
The report said credit quality of corporates is likely to be weakened by slow growth in GDP, heightened currency volatility and higher-than-expected interest rates.
"Specifically, stress will increase in sectors such as power, construction, engineering and steel, and lead to higher non-performing assets (NPAs) in the banking system." It said the falling rupee, coupled with weak systemic liquidity, will increase refinancing pressure on companies.
On banks, the report said it expects NPAs to increase to around 4% of advances by the end of the fiscal from 3.3% a year ago.
On the auto sector, the agency said it sees car sales declining 2-3%, while that of medium and heavy commercial vehicle 1-3% in 2013-14.
It also sees stress on the realty front and lowered growth for the sector, saying "we are lowering growth in new home sales by 400 bps and volume growth for steel and cement sector by about 100 bps".