NEW DELHI: India's struggling economy is crying out for interest rate cuts to spur growth but with the rupee on the ropes monetary easing is out of the question at next week's central bank meeting, analysts say.
From being an investor hot-spot, Asia's third-largest economy has been hit by capital flight even as it has been taking bold fresh steps to open its state-dominated economy to outsiders.
"The last thing the Reserve Bank would want to see is rupee depreciation get out of hand," said Credit Suisse economist Robert Prior-Wandesforde, ruling out a reduction in benchmark rates at Tuesday's central bank policy meeting.
Weak growth, a ballooning current account deficit, and stalled reforms amid a slew of graft scandals that have paralyzed the political process have combined to take the shine off India.
The most visible casualty of the country's unloved status has been its currency, which this month slid to a lifetime low of 61.21 to the dollar, pushing the bank into crisis management mode.
The central bank raised two short-term lending rates last week to ease pressure on the currency which steadied to a five-week high of Rs.58.66 to the dollar on Friday.
But with a slowdown that began with a downturn in the industrial sector but has since spread to the services industry, economists say the rupee is not out of the woods.
Any new slide in the currency could lead to a hike in benchmark lending rates with Rs.60 to the dollar seen as the central bank's "Maginot Line" to be defended, analysts say.
The bank's tightening is creating fresh problems for an economy which grew at a decade-low of five percent last year and the Congress party-led government which is desperate for a financial recovery before facing voters in 2014 elections.
On Friday, top Indian ratings agency Crisil sounded the alarm about company balance sheets, saying one-third of the 11,500 firms it rates may not be able to make their debt repayments due to the recent central bank liquidity tightening.
"Stresses will increase in sectors such as power, construction, engineering and steel," said Crisil Chief Executive Roopa Kudva, forecasting more bad loans on commercial banks' books.
Analysts say India is caught in a vicious circle with the sluggish economy and a vulnerable currency discouraging vital foreign investment that the country desperately needs to upgrade its dilapidated infrastructure and spur growth.
Foreign direct investment fell 21 percent on a annual basis last year and economists are pessimistic about the outlook for this year.
The souring mood was driven home this month when legendary US investor Warren Buffett abandoned his online Indian insurance venture after two years ago hailing India as a "dream market".
Around the same time, South Korea giant POSCO and ArcelorMittal, top global steelmakers, said they were scrapping multi-billion-dollar plans for new mills in India, blaming lengthy land acquisition rows and local opposition.
The plant cancellations, while not a surprise due to the weak steel market, reinforced the view that India with its bureaucratic red tape is a tough place to do business.
The government has acknowledged the nation will post lower annual growth in 2013-14 than the 6.5 percent it initially forecast.
Economists expect expansion to be similar to last year's — in the 5.0-5.3 percent range.
There is one bright spot — the crucial monsoon rains running at 25 percent above average, providing relief to farmers who still rely on the erratic rains to soak 60 percent of India's farmland.
"It is unfortunate that the only good news comes from the heavens above, rather than from those running the economy here on the ground," said Greg Levine, an economist at Moody's Analytics.
India unlikely to raise rates as rupee on the ropes
