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The recent monetary tightening measures by the Central Bank is increasing the downside risk to the country's growth outlook, which could fall to sub 5% in the current financial year if these measures are prolonged, experts say.
According to foreign brokerage Bank of America - Merrill Lynch (BofA-ML) prolonging the recent liquidity tightening moves by the Reserve Bank may have an adverse impact on GDP growth which could slip to a low of 4.8%.
Meanwhile, Morgan Stanley in a research note, said that the recent monetary tightening and uncertain global capital market environment could mean growth stays low for at least two more quarters and increases the risk of GDP growth sliding to 3.5-4%.
India's growth fell to a decade's low of 5% in fiscal 2012-13.
India's GDP growth was below 5% during the quarters ending December-2012 and March-2013 and is unlikely to have increased during the quarter ending June 2013, Morgan Stanley said in a research note.
"A weak growth trend lasting for 4-5 quarters would increase the risk of a vicious cycle building, whereby the economy becomes vulnerable and the risk increases of GDP growth sliding to 3.5-4%," Morgan Stanley Managing Director and the Asia Pacific Economist Chetan Ahya said.
According to DSP Merrill Lynch Chief Economist Indranil Sen Gupta, "incoming data should reinforce our view that FY14 growth will slip to 4.8% if RBI tightening is not rolled back before the October-March busy season."
In two sets of announcements last month, the RBI had taken a string of liquidity tightening measures aimed at curbing speculation on the depreciating rupee, which has lost nearly 12% against the dollar since the start of FY14.
The unconventional steps included limiting banks' overnight borrowing to 0.5% of their net demand and time liabilities, more sale of government bonds and raising the interest rate on the marginal standing facility for banks.
Morgan Stanley further noted that, if the rupee continues with the downtrend, the government is likely to augment capital inflows in some form of dollar debt.
However, such a move would only help cushion the pace of weakening in the currency, and not make a major difference in the trend unless the global environment changes, it said.
"A sustainable solution would be to accelerate implementation of structural reforms that in turn help correct the imbalances in the economy and put it back on a positive productivity dynamic," Morgan Stanley said.
The rupee crossed the psychological level of 60 per dollar in June-end and crossed the 61-level for the second time this week.
