The positive movement of the stock market and mixed economic indicators are expected to be short-lived and the worst is not over for the Indian economy, according to Moody's.
"The positive sentiment is expected to be short-lived, as India essentially only started feeling the pinch of the global downturn in the December quarter and the worst is yet to come," Moody's economy.com said in a research report.
The industrial production growth slipped into negative territory for the third time in the current fiscal by 0.5 per cent in January while exports also dropped by 15.9 per cent on a year-on-year (y-o-y) basis in the month.
However, expectations of further monetary easing measures by the Reserve Bank increased after inflation fell to 0.44 per cent for the first week of March against 2.43 per cent a week ago.
Since October, RBI has infused over Rs 4,00,000 crore in the system by cutting ratios and signalling interest rate cut.
There is also some positive news from Dalal Street as the Bombay Stock Exchange benchmark index Sensex surged 245 points in this week.
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Moody's added that the Indian economy is likely to grow by 6.3 per cent with some downward risk in the current fiscal against government estimate of 7.1 per cent.
For the year 2009, India's growth rate is unlikely to exceed five per cent, but a recovery in the opening quarter of 2010 due to expected rebound of the US economy in the December quarter, should lift annual expansion to about five per cent for fiscal 2009-2010, it said.
It further added that the market sentiment is still unstable in India and so far in 2009 there has been a net outflow from the Indian stock market.
Even businesses in India continue to be troubled by liquidity concerns and tight access to credit.
"As the current focus of many firms is to refinance debt and survive the financial turmoil, investment is expected to be subdued this year," the report added.
Moody's expects long-term investors to continue to value India's underlying growth potential, but speculators who are facing liquidity constraints, are likely to stay clear of emerging markets on signs of turbulence.
"As the current focus of many firms is to refinance debt and survive the financial turmoil, investment is expected to be subdued this year," it added.