India Crisis: Goldman Sachs Slashes GDP and Rupee Forecasts for Troubled Emerging Economy

Goldman Sachs is warning that India's GDP growth could slow further during 2013 and joined a growing list of banks and brokerages to slash their growth forecasts for the emerging Asian market.

Goldman cut its India's growth forecast to 4% from 6% for the 2014 financial year. The bank also revised its growth forecast for the subsequent year to 5.4% from 6.8%

The investment banking giant said the downgrade was indicative of the increasingly difficult external funding conditions for Asia. Emerging market economies are struggling to cope with a flight of capital from their economies, triggered by an expected cutback in the US Federal Reserve's monetary stimulus.

Economists at Goldman also warned that the depreciated rupee, which finished at 67.73 to a US dollar on Tuesday, could trade at 70 within three months, at 72 within the next six months and climb back to 70 within a year.

The Goldman downgrades come after HSBC, JPMorgan and Nomura also cut their India growth forecasts in the week before.

Earlier in the day, rating agency Standard and Poor's (S&P) said the chances of a credit ratings downgrade for India were "higher" than other emerging market economies such as Indonesia, reported Bloomberg.

"We think that there could be some risks of near-term overshooting of our targets if economic and financing conditions worsen, and especially if there are pressures on the banking and corporate sectors due to weakness in growth," said Goldman Sachs.

S&P credit analyst Kim Eng Tan said in Seoul the agency has a negative outlook on India, "which means that over the next one to two years we think chances of downgrades are more than one in three".

India's benchmark Sensex finished 3.45% lower or 651.47 points to 18,234.66 in Mumbai on 3 September.

The day before, HSBC slashed its India GDP forecast for the ongoing financial year just as a separate HSBC-Markit survey revealed that business conditions in the Indian manufacturing sector deteriorated in August. The Asia-focused bank revised its India growth forecast to 4% from 5.5% and said that macroeconomic uncertainty was likely to pull down growth in the coming months.

JPMorgan cut its India GDP growth forecast to 4.1% from 5.1% and said that high interest rates among other factors could weigh on growth, while brokerage firm Nomura estimated real GDP growth to hover between 4.2% and 5.0%

Morgan Stanley has said the country's growth could slide to between 3.5% and 4%.

A week before, French bank BNP Paribas slashed its India GDP forecast to 3.7% from 5.7% and said that the country's macroeconomic situation was "fast approaching crisis proportions". If met, it would mark India's lowest growth rate in 22 years.

India's factories cut production for the fourth successive month in August and at the fastest rate in over four-and-a-half years.

India is battling high inflation, falling GDP growth, a huge trade gap, a depreciating rupee and political turmoil.

However, Prime Minister Manmohan Singh expects growth to "pick up" as the effects of good monsoon rainfall kick in later in the year. The annual monsoon accounts for 70% of India's rainfall and irrigates more than half its farmland.

The Indian economy grew at its slowest pace in four years in the April-June quarter. Growth dropped to 4.4% as against 4.8% during the January-March quarter.

Economic growth hit a decade low of 5% in the 2013 financial year.