Economists said this negative news was not needed at a time when sentiment in the Indian markets is already weak.

Shuchita Mehta, senior economist at Standard Chartered Bank, said the revision is a negative and will add pressure on the rupee, bonds and availability of credit. "Interest rates are already on the rise and companies may find it more difficult to raise money. Bond sentiment will also be impacted," Mehta said.

Standard Chartered expects the rupee to weaken to 44 by June 2009 from Tuesday's close of 43.23.

The rupee has already lost 8.8% of its value in 2008.

James McCormack, head of Asia sovereign ratings at Fitch, said the revision in local currency outlook is based on deterioration in the central government's fiscal position in 2008-09 (FY09), combined with a notable increase in government debt issuance to finance subsidies not captured in the budget.

Fitch expects India's fiscal deficit to rise to 4.5% in 2008-09 from 2.8% of GDP last year. If the off balance sheet government expenses relating to oil and fertiliser companies are taken into account, the deficit looks worse at 6.5%.

Abheek Barua, chief economist at HDFC Bank, said the revised outlook means already high foreign currency loan rates becomes even more expensive. "We could see some uptick in external commercial borrowing (ECB) rates, which have risen by 200-400 basis points, because of global uncertainties in the last 7-8 months. Also, the rupee is fragile right now, so there will be some negative impact," he said.

Barua expects the rupee to fall to 44 by September end and then bounce back to 42.50 in the January-March quarter.

Fitch also expects the Indian trade deficit to widen to 8.2% of GDP in 2008-09 and capital inflows to decline sharply in FY09 "based on the change in global investor risk appetite and the less certain short-term macroeconomic outlook for India."