According to Macquarie Securities, significant capital outflows from India amid an environment of already weak growth and slow progress in undertaking much needed policy reforms is weighing down potential growth.

"We are downgrading our FY14 GDP growth forecast to 5.3 percent YoY from 6.2 percent YoY estimated earlier," Macquarie Securities said in a research note.

Going forward, the country's GDP growth is likely to recover only gradually to 5.9 percent year-on-year in FY'15.

"India's macro environment is at a crossroads, facing headwinds from sharp capital outflows, rupee depreciation and high cost of capital, which can possibly reverse the gains realised on macro stability indicators like inflation, current account deficit and fiscal deficit," Macquarie said.

According to Macquarie, the downward revision in India's growth forecast was largely due to capital outflows and rupee depreciation which in turn increased external stability risks and constrained policy rate cuts.

Other key factors for the downgrade include political uncertainty and reform momentum; and a continued slowdown in new project inflows delaying a capex cycle recovery.

Macquarie believes the weakness in the rupee is likely to persist in the short to medium term.
"Assimilating the sharp depreciation of the Indian rupee against the US dollar since May, 2013 and continued dollar strength, we maintain our base case expectation of INR/USD averaging around 59 with a downward bias in FY14," Macquarie said.

The rupee has depreciated by more than 10 percent in the last one month and crossed the psychological level of 60 per dollar in June-end and touched over 61-level last week.

On rate cuts, the report said that the sharp rupee depreciation and capital outflows will delay lowering of policy rates by the RBI until currency stabilises.f

The RBI is scheduled to hold its first quarter monetary policy review on July 30. The industry has been demanding a cut in key policy rate to boost economic activities.

PTI