Boston, MA -- (ReleaseWire) -- 09/27/2012 -- Core Views The Indian National Congress (INC) lost heavily in the country's recent state elections. The ruling United Progressive Alliance (UPA), led by the INC, now has reduced political clout. This suggests a higher risk of policy paralysis, which could potentially lead to early elections. Our core view is that real GDP growth has bottomed out, and we expect to see the country posting higher quarterly growth rates in the fiscal year ahead (FY2012/13, April-March). We project real GDP growth will tick up to 7.3% this fiscal year, from an estimated 6.8% in FY2011/12. The crucial part of our expectation for an acceleration of growth hinges on the assumption that the central bank will soon ease monetary policy. We are projecting 75 basis points (bps) of interest rate cuts through FY2012/13. The recovery is unlikely to be V-shaped, as we do not expect a strong bounce in overall investment activity. Disinflation is expected to carry on, with our current forecast projecting average wholesale price inflation falling to 6.6% in FY2012/13, from an estimated 8.7% last fiscal year. Inflation should continue to ease considering the ongoing deceleration of M3 money supply growth. We were once again disappointment by the government's FY2012/13 budget, which was announced on March 16, given the absence of meaningful measures to consolidate its fiscal position. In addition, its poor track record last fiscal year leaves much to be desired, suggesting to us that its FY2012/13 targets are on the ambitious side. India's balance of payments position remains highly vulnerable from a possible sustained increase in oil prices, a weaker-than-expected European economy, and a downturn in global risk sentiment. Key Risk To Outlook Upside Risks To Policy Rate Outlook: The risk of continued fiscal indiscipline and the persistent threat from global oil prices pose upside risks on our outlook for the central bank to cut its repo rate by 75 basis points to 7.75%. Upside Long-Term Growth Risks From Structural Reforms: Should the government successfully embark on reforms - particularly to investment regulations in the retail and insurance sectors - we may see a sustained increase in foreign direct investment, boosting longer-term growth.
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