Given the absence of a pickup in private investment activity despite an improvement in sentiments; low transmission of the reduction in the cash reserve ratio (CRR) since September 2012; expectations of back-ended cut in the Repo rate (reduction of 50 bps in Q4FY13); and moderating consumption demand, rating agency ICRA has lowered the estimate for India’s economic growth for FY13 to 5.4 per cent from 5.7 per cent earlier.
The local unit of global rating firm Moody's Investor Services, raising the spectra of a rating downgrade, is also expecting government to overrun the upwardly revised fiscal deficit target due to lower revenue growth and its inability to cut expenses. 'Fiscal deficit is expected to exceed the revised target of 5.3% of GDP, in light of substantial under-recoveries on various regulated fuels already incurred,' said ICRA in a report. Further, 'limited flexibility to control various types of expenditure and the likelihood of both tax and non-tax revenue receipts falling short of the budgeted amount' could boost government borrowing, ICRA underscored, without saying whether it would have a bearing on sovereign rating.
On monetary credit policy front, the rating agency expects repo rate to be reduced by a further 50 bps in the remainder of the current fiscal year, the timing of which would be guided by growth-inflation dynamics. At present, ICRA expects the Central Bank to slash CRR by 25 bps in the December 2012 mid-quarter policy review to ensure credit flow to productive sectors. Moreover, notwithstanding the impact of a weaker Rupee on competitiveness, demand for Indian exports is expected to remain muted in H2FY13, thereby reflecting global economic conditions, the rating agency opined.
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