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May 17, 2012, 10.25 AM IST
Even as the finance minister defended the India growth story, Citigroup has poked holes in it.
Even as the finance minister defended the India growth story , Citigroup has poked holes in it. A scathing Citi report warns that the rupee could hit 60 to a dollar and adds that India's four deficits -- current account, fiscal, governance and liquidity -- are mainly its own doing. CNBC-TV18's Sajeet Manghat and Ashmit Kumar report.
For North Block, the hits just keep on coming. Citigroup, fresh from a meeting with global investors, has no good news for India.
The overarching sentiment is that India is facing not one, not two, but four deficits -- current account, fiscal, governance and liquidity. And that's why India's rating in the global investor community is falling.
Citi says investors agree that India’s growth will remain shackled at a modest 6 -7% and adds, "The unfortunate part is that the problems appear self inflicted with India now seen to be specializing in scoring self goals."
Political inertia is seen as the single most important reason for the de-rating of the India story.
The biggest worry is over financing of the 4% current account deficit.
While investors were divided on whether rising gold imports represented the flight of capital or a shift in portfolio allocation, they all agree that a declining confidence is taking a toll on the currency.
The consensus expectation is that the rupee could well drop to 60 to a dollar.
Investors are now looking to a fuel price hike as evidence of government action. Having said that, Citi adds that India needs a bit of luck to turn the vicious cycle into a virtuous one.
With average crude prices pegged at USD 125 dollars per barrel, Citi says even a USD 10 reduction in the price could mean a 10% drop in current account. And while a lower subsidy bill and a drop in inflation will allow RBI some headroom on the rate front, capital flows will be key in stemming the rupee's fall.
Citi also warns that unless things improve, India may see more downgrades and might end up below the lowest investment grade rating.
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