Goldman Sachs has lowered India's growth forecast for the current financial year to 4 per cent from 6 per cent earlier and is expecting the rupee to touch 72 against the US dollar in next 6 months.
According to the global brokerage firm, India and most of the Southeast Asian countries are likely to see "difficult external funding conditions" as markets are anticipating US Fed tapering and eventual exit from unconventional monetary policies.
"For India, we have cut our FY'14 GDP growth forecast to 4.0 per cent, from 6.0 per cent earlier, and our FY'15 forecast to 5.4 per cent, from 6.8 per cent previously," Goldman Sachs said in a research note.
In the near term, Goldman Sachs sees risks as the economy is likely to need an adjustment in the current account and fiscal balances, and says it "may require below-potential growth for several more quarters to reduce inflation, before we can see an economic recovery".
The report further added that not only has data come in worse-than-expected in Q2 2013, the external funding pressure since early May was the major driving factor behind the GDP downgrade.
According to official figures, the country's economic growth in the April-June quarter slid to 4.4 per cent, the lowest in past several years, pulled down by drop in mining and manufacturing output.
Meanwhile, the global broking major has also lowered its rupee forecast, and sees further real depreciation over 3 to 6 months given the challenging external funding environment and the slowdown in GDP growth.
"We change our 3, 6, and 12-month USD/INR forecasts to 70, 72, and 70 (from 60 flat) respectively," the report said.
The rupee had touched an all-time intra-day low of 68.85 to a dollar on August 28 and is currently hovering around the 67/USD mark in highly volatile trade.
"We see further real depreciation over 3 and 6 months given the challenging external funding environment and the slowdown in GDP growth. Over 12 months, we expect some stabilisation, with the removal of election uncertainty in March-April likely to help sentiment, and adjustment in the current account in progress," Goldman Sachs said.
Notwithstanding the fact that the global brokerage has downgraded its India forecast significantly, it remains optimistic about its long-term potential.
"We continue to believe that a rising middle class, favourable demographics, need for investments, especially on infrastructure, and productivity catch-up across a broad swathe of sectors can drive growth over the medium term," it said.