India's growth outlook faces downside risks due to the evolving nature of the global financial crisis and gross domestic product (GDP) growth is seen slowing this fiscal and the next, Macquarie said in a note.
"On our current forecast, GDP growth is poised to fall to a seven-year low of 6.0 per cent in 2009/10, from an estimated 7.2 per cent in 2008/09," Macquarie analyst Rajeev Malik said in the note released on Monday.
India's economy grew at an annual rate of 9 per cent or more in the past three years, second only to China among the major economies. Last month, the central bank cut its estimate for FY09 growth to 7.5-8.0 per cent, but analysts expect it to be lower.
"India's investment spending will be a serious casualty of the current global crisis, despite the economy's relatively low export-to-GDP ratio," Macquarie said.
It expects a sharp slowdown in capital expenditure by firms also to lower the GDP growth.
Unlike China, India has little scope for significantly boosting fiscal spending, and hence the key policy reliance will be on aggressive monetary easing, Malik said.
Malik expects the central bank to continue easing monetary policy, as it has the flexibility to act aggressively through its three main instruments - the short-term lending rate, banks' cash reserve requirement and statutory liquidity ratio.
"We maintain that the RBI will continue with the mother of all monetary easings," Malik said.
Over the past month, the central bank has reduced the repo rate, at which it lends funds to banks, by 150 basis points to 7.5 per cent.
It has also, in recent months, lowered the cash reserve ratio by 350 basis points to 5.5 per cent, and the ratio of deposits banks must invest in bonds, by 100 basis points to 24 per cent.
Malik expects the aggressive monetary easing to cushion the slowdown, and a possible economic rebound in the second half of fiscal 2009/10.