Boston, MA -- (SBWIRE) -- 11/26/2013 -- 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 nine months.

The leaders of India and Pakistan met face-to-face for the first time in September, demonstrating that relations between the two nucleararmed powers remain cordial despite rising tensions.

Starting with the sell-off in the rupee, economic headwinds have accumulated quickly in India, forcing us to downgrade our real GDP growth expectations. We now see full-year real GDP growth remaining flat at 5.0% in FY2013/14 (April-March), unchanged from the same growth rate registered in FY2012/13.

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While it is too early to conclude whether or not India's sovereign credit rating will be downgraded, we believe that the domestic fiscal risks of such an event have risen over the past few months, due to insufficient revenues, the political pressure to spend in the lead-up to the general elections, and the recent passage of the food security bill.

India's large current account deficit and rapidly rising foreign debt stock are often cited as major reasons why the country faces a major external crunch. However, our analysis of the numbers suggests that India is unlikely to face systemic risks from its external position anytime soon.

The Reserve Bank of India surprised with a 25bps repo rate hike in its September monetary policy review. We are keeping to our end- FY2013/14 repo rate forecast of 7.25%, which implies a resumption of dovish policy by the end of the year once headline inflationary concerns subside and anxieties over growth rise to the surface.

Major Forecast Changes

We have downgraded our real growth projections for private domestic demand (private consumption plus gross fixed capital formation), culminating in a revision of full-year headline real GDP growth forecast to 5.0% for FY2013/14, from 5.5% previously.

Given the government's poor fiscal record so far, we have decided to nudge down our FY2013/14 central government fiscal deficit forecast to 5.2% of GDP from 5.0% previously.

Key Risk To Outlook

Downside Risks To Growth: The manner in which the government responds to looming electoral pressures in the run-up to the 2014 general elections could see the Indian economy swing either way. In the bearish case, the government could opt for a more populist approach, which then leads to a further exacerbation of the country's twin deficits. In the near term, the rupee's recent collapse poses a risk to growth via channels such as a steep rise in imported inflation.

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