Moody's Analytics Cuts India's 2012 Growth Forecast On Poor Monsoons, Policy Inaction

Moody's Analytics cut India's growth forecast to 5.5 percent for this year, citing the policy inaction on the part of the government and the Reserve Bank of India's decision to keep the key rates unchanged despite an economic slowdown.

In a note dated August 8, Moody's said that the slowdown in India's economy "has been sharper and more broad-based than anticipated and is now deeply entrenched across all sectors of the economy," Reuters reported.

Despite the slowing growth, "both the government and the Reserve Bank of India had provided little policy response," said Moody's.

Poor monsoon also prompted the credit rating agency to cut the growth and it said that "weaker-than-average rainfalls during the monsoon period would also weigh on India's growth."

The monsoon is vital to the economy as a low rains can adversely affect the country's key sectors like farming and manufacturing and further push inflation up.

India's industrial output for the month of June contracted 1.8 percent annually, signaling a slowdown in investments in the country. The exports also declined sharply in June.

There has been a strong demand from the industry to cut the key interest rates, but the RBI has declined to reduce the rates stating high inflation in the country.

After assuming office last month, Finance Minister P Chidambaram said that the government would work with the RBI towards reducing the interest rates to boost investments.

The investor sentiment in the country dampened after former Finance Minister Pranab Mukherjee had introduced retro taxing provisions in tax laws.

Moody's also cut its 2013 growth forecast to 6 percent from 6.2 percent.

CLSA cut the growth outlook for India to 5.4 percent in the fiscal year ending March 2013 while Citigroup cut its outlooks for the country to 5.5 percent recently.