Global finance major BNP Paribas has revised downward its growth forecast for the Indian economy to 6.5 % for 2011-12, citing sliding capital expenditure and the country's exposure to European banks.
It had earlier projected the growth at over 7 %.
"Our FY-12 GDP forecast is cut to 6.5 % with FY-13's 7.1 % expectation underlining that the economy will not quickly regain its prior dynamism thanks to sliding capex spending," BNP Paribas said in the latest issue of 'India Economics: Eye on the Tiger'.
"India's relatively high exposure to European bank de-leveraging leaves the risks to even these downbeat forecasts still skewed to the downside," it added.
BNP also said the Indian rupee is highly exposed to accelerated, and potentially disorderly, de-leveraging by European banks and over the next 3-6 months the risk is clearly for further weakness which may worsen growth.
BNP said that while a healthy monsoon has boosted agriculture output, with the farm sector expected to grow by around 5-6 % in the current fiscal, non-agricultural GDP is projected to be unusually weak with.
It's GDP growth projection is almost a full percentage point below the Reserve Bank's 7.6 % forecast made in its October review and the government's recently reduced 7.5 % expectation for FY-12. The Indian economy had expanded by 8.5 % in 2010-11.
"As we have long warned, with the weakness concentrated in the end of the fiscal year and weak capital spending inhibiting supply-side developments, FY-13 is unlikely to see a rapid recovery," it said.
Economic growth in the second quarter (July-September) was a meagre 6.9 %, lowest in over two years, because of poor performance by manufacturing and mining sectors.
Industrial production entered negative zone in October and contracted by 5.1 %.
In its mid-quarter policy review released on Friday, RBI said that the domestic policy uncertainties and the tight monetary stance are among the factors leading to slowdown and cautioned against downside risks to growth.
With regard to its growth projection of 7.6 % for the current fiscal, RBI said, "considering the global and domestic macroeconomic situation, the downside risks to the RBI growth projection, as set out in the second quarter review (in October), have increased significantly".
BNP said, meanwhile, that the overall inflation in India will moderate to 7 %, as projected by the government and the RBI, by the fiscal-end and may fall even below that.
"A collapse in food inflation through November leaves Wholesale Price Index (WPI) inflation on course to meet, even undershoot, the RBI’s 7 % March 2012 forecast, increasing the central bank's scope to cushion these downside risks," BNP said.
Headline inflation has been above the 9 % mark since December 2010. However, it fell to one year low of 9.11 % in November this year.
Food inflation also moderated to a four-year low of 4.35 % as on December 3. It has witnessed a declining trend since late October when it was in double-digit.
RBI has increased interest rates 13 times since March 2010, to tame inflation. India Inc has blamed the repeated rate hikes, which have led to an increase in the cost of borrowings, for hindering fresh investments and industrial slowdown.
In its mid-quarterly review on Friday, the central bank kept its key policy rates unchanged and hinted at rate cuts in future.