Goldman Sachs downgraded its rating on Indian stocks to "underweight" on concerns about delayed growth recovery and rising vulnerabilities for the economy. The external funding environment has also become challenging causing RBI to tighten liquidity, the investment bank said in a note.
Goldman Sachs also expects corporate earnings to grow at 5 per cent for the current fiscal year and 11 per cent for the next year, below consensus estimates.
Meanwhile, the Reserve Bank India has intervened in the foreign exchange market on Thursday to stop the rupee's slide towards a record low as its defence of the currency, built around draining cash from money markets, came under rising pressure. With the RBI struggling to hold the line, investors are sceptical whether the government will take swift, credible action to reduce a gaping current account deficit despite Finance Minister P Chidambaram's assurances.
"The market wants real action," said Param Sarma, chief executive at NSP Forex, a consultancy firm in Mumbai. "The government and RBI want to keep rupee under control to check inflation and to ultimately reverse tightening measures so they can support growth."
Sarma, along with many others, believes the government could opt to issue a bond aimed at drawing inflows from expatriate Indians, as the central bank has voiced its opposition to a sovereign bond issue. The rupee has lost 11.4 per cent since the start of May, and by mid-morning it was quoted at 60.54 per dollar, as RBI dollar selling brought it off a session low of 60.8325 and forestall a move back toward a July 8 record low of 61.21.
The need to shore up the economy with economic reforms is becoming more urgent given the prospect the Federal Reserve will at some point start removing its US monetary stimulus, making the global investment environment even more difficult for India.
Both Citigroup and Deutsche Bank have this month downgraded India's economic growth forecasts, citing in part the prospect that the RBI's measures will dampen investment. Chidambaram said on Wednesday the government was looking into various options to attract inflows, including relaxing overseas borrowing rules and curbing some imports.
The economy is stuck in a quagmire of low growth, persistent inflation, a wide current account deficit and a rapidly weakening currency, but policy measures to tackle any one of these will likely worsen the others. By virtue of being a net importing country, a weakening currency quickly inflates India's import bill leading to higher inflation and a wider current account deficit, which in turn pressures growth and the country's foreign exchange reserves.