Persistent rise of dollar may pull down GDP to 4.5-5% in FY'14

Two global trends the dollar's rise and China's slowdown, a challenge for Asia: Morgan Stanley

India is likely to be exposed to severe funding risks if the US dollar continues with uptrend and could bring the country's growth rate down to 5% in the current fiscal, says a Morgan Stanley report.

Over the last few weeks there is a simultaneous emergence of two global trends the dollar's rise and China's slowdown, which in turn is becoming a challenge for the Asia Excluding- Japan region, said the American brokerage.

Every country in the Asian region including India will be exposed to downside risks to growth via its exposure to at least one of these two trends, it said.

"A persistently quick rise of the dollar over the next 3-6 months could bring GDP growth down to 4.5-5% in FY2014 as compared with our base case estimate of 6%," the Morgan Stanley research report added.

The rupee has depreciated more than 10% in the last one month and crossed the psychological level of 60/USD in June end.

While the government has initiated measures to improve the productivity dynamic within 6-9 months, India's current account deficit is expected to remain high, leaving it exposed to this external development, the report said.

If currency depreciation pressures continue to rise, the government is expected to augment capital inflows in the form of either debt raised by state-owned companies/institutions, a non-resident Indian deposit scheme or a sovereign bond issue.

Morgan Stanley further noted that if there is a persistently speedier rise in the US dollar and slowdown risks in China, it could hurt a large number of other commodity- producing emerging markets and increase the risk of an emerging market-wide systemic sudden stop (SSS) in capital inflows.

"This scenario would bring a disruptive correction in India's growth, with all components of growth, including investment, consumption, exports and government spending, suffering," it added.