Boston, MA -- (SBWIRE) -- 06/06/2012 -- Core Views Despite recent encouraging Purchasing Managers' Index data, we continue to believe that real GDP growth will come in at a three-year low of 6.8% in FY2011/12 (April-March), with Q4 FY2011/12 likely to disappoint. Aside from this single indicator, most trends (including collapsing export growth and slowing credit expansion) still paint a dreary picture of the Indian economy. We expect activity to bounce back somewhat in FY2012/13 (with our full-year growth forecast currently at 7.3%) as the central bank starts to cut its policy rates, which have essentially choked the Indian economy over the past year. We are pencilling inflation to end the current fiscal year at 7.5%, falling further to 6.5% by end-FY2012/13. We expect at least 75 basis points worth of cuts by FY2012/13, taking the Reserve Bank of India's repo rate to 7.75%. Fiscal slippage in FY2011/12 has exposed the government's inability and unwillingness to shore up India's public sector balance sheet, and the near-term prospects for a major consolidation effort appear slim. Nonetheless, in the current climate of heightened investor scrutiny towards fiscal profligacy, the danger of a sovereign ratings downgrade may force the authorities to present a less populist budget once state elections take place in February-March 2012. For now, we are maintaining caution, as reflected in our 6.0% central government fiscal deficit projections for FY2011/12 and FY2012/13. Major Forecast Changes We have downgraded our FY2011/12 and FY2012/13 real GDP growth forecasts to 6.8% and 7.3% respectively as we believe that the economy will not be able to export its way out of this current slump, nor will the government be able to enact sufficient fiscal support, making the downturn more severe than in FY2008/09. Key Risks To Outlook Downside Growth Risks From Spiralling Inflation: Should food prices and oil prices maintain their upward march, there is a risk that we could see additional monetary tightening, which would surely come at the expense of headline economic growth. 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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