Goldman Sachs cut its growth forecast for India citing "larger-than-expected shock" to the financial sector over the last couple of months, and its knock-on effects on both domestic and external demand.
The brokerage lowered its GDP growth numbers for FY09 to 6.7 per cent from 7.5 per cent and for FY10 to 5.8 per cent from 7 per cent, Goldman said in a research note today.
"We believe there is little fiscal room for additional stimulus in FY10. We expect growth to trough at a quarterly pace of 5.0 per cent in the April-June quarter of FY10, before recovering to 6.6 per cent by end-FY10. The slowdown, in our view, is very much cyclical in nature," the brokerage said.
Goldman Sachs said the gathering financial crisis over the past several weeks has affected India's financial sector significantly, with both domestic and external liquidity drying up. This has impacted the financing for corporates, loans for households, and trade credit for exporters.
"The real economy is already beginning to feel the effects of the liquidity crunch despite the Reserve Bank of India (RBI) and the government's massive liquidity infusion efforts," the research note said.
Goldman believes the large global and domestic financial sector shock will continue to slow activity across the board, in capex plans, exports growth, and consumption demand.
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According to the note, corporates will be hurt. This will in turn impact investment and external demands, and slow down consumption. On the production side, a significant slowdown in construction and real estate, and in industry is expected.
However, the brokerage sees a silver lining. "A large monetary policy stimulus, prospects of a good agricultural crop supporting rural demand, lower commodity prices, and ongoing infrastructure spending would limit further downside to growth," it said.