India's economic growth is likely to remain below 8% in the coming quarters owing to aggressive monetary tightening and worsening global prospects, Citigroup said in a research report.
"Recently-released macro and sectoral data indicate a clear slowdown in economic activity," Citigroup said, adding that the "growth in the coming quarters will likely remain in the sub-8% range and average 7.6% in FY12."
India's GDP growth slipped to 18-month low of 7.7% in April-June quarter, the second consecutive quarter of sub-8% growth.
"We expect this trend to continue due to lagged effect of 500 bps of tightening, structural policy issues, and worsening prospects on the global front," the report added.
The domestic economy had clocked 8.5% growth last fiscal, following which the government had first projected a 9% growth in the Budget, but revised it downwards to 8.2% after the worsening of the Eurozone sovereign debt crisis and the fear of a double-dip recession in the US.
The worsening global economic situation has taken a toll on the domestic currency and equities. Moreover, higher deficits and peaking inflation is likely to further add to the burden, Citigroup said.
Over the last month, the rupee has weakened 7.3%, and the BSE benchmark Sensex has dropped 3.98%. The headline inflation for August stood at an uncomfortable 9.78%.
"While we have been expecting inflation to remain elevated due to higher minimum support prices of agricultural crops and continued upward revisions to past data; two further price pressures have emerged, firstly commodity prices have showed no sign of abating despite slowing global demand and secondly, weakness in rupee, which adds to inflationary woes," the report said.
"This puts the RBI in an unenviable position of balancing slowing growth and rising inflation," Citigroup said.
The central bank has raised its key rates 12 times in 18 months to control inflation, with effective tightening at 500 bps.
India is, somewhat in a better place than its Asian peers. Positives for India include the country's low exports to GDP ratio, domestically financed fiscal deficit, limited exposure to foreign liabilities, and a healthy banking system.
However, in times of risk aversion, India immediately comes on the radar due to its reliance on external capital, Citigroup said.
India's April-July fiscal deficit stood at Rs 2,288 billion, compared to Rs 909 billion in the year-ago period.
"Despite the announcement of austerity measures, we expect the government to miss its deficit target due to both lower revenues and higher expenditures," the report added.
