Boston, MA -- (SBWIRE) -- 08/21/2013 -- While the declining support for the Indian National Congress (INC)- led ruling alliance and the rising popularity of the Bharatiya Janata Party (BJP)-led political opposition is unsurprising, we believe that it is too early to tell whether these trends will persist through to the next general elections. A few critical factors (such as the opposition's internal disagreements) could turn the political tides in the INC's favour over the next 12 months.

The May-June collapse of the Indian rupee has reinforced our concerns that the country is unlikely to enjoy a forceful economic bounce in the coming quarters, and justified the decision to downgrade our real GDP growth projections back in April. Our forecasts see fullyear real GDP growth improving marginally to 5.5% in FY2013/14 (April-March), from 5.0% in FY2012/13.

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We believe that the Reserve Bank of India's decision making process over the coming months will centre around the country's fragile external dynamics, which for us means a continued pause in its current easing cycle. At the moment, our projection is for the benchmark repo rate to remain at 7.25% through the remainder of FY2013/14.

The enduring size of India's current account deficit in the face of an ongoing growth deceleration is disconcerting, as it signals that the country has yet to undergo the external rebalancing needed to put the economy back onto an even keel.

While it is likely to remain volatile in the near term, we believe that there is a compelling case to be made that the rupee regains some strength from current levels over the medium term. Amongst other factors, falling global oil and gold prices should see the unit slowly recoup some lost ground.

The budget plans for the current fiscal year were distinctly underwhelming, reflecting our earlier expectation for a mixture of both populism and pragmatism. We forecast an end-FY2013/14 central government deficit of 5.0% of GDP, as we believe that its revenue targets are too optimistic and we note the lack of a concerted effort to rein in expenditures.

On a related note, we believe that credit protection on the quasisovereign State Bank of India is one again looking attractive.

Major Forecast Changes

Taking into account the extreme weakness against the greenback in May-July, we have adjusted our average currency projections for 2013 and 2014 to INR56.00/US$ and INR54.00/US$, respectively, from INR54.40/US$ and INR52.50/US$ previously.

Key Risks To Outlook

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