Indian growth to shrink to 3.8%: IMF

But the IMF lowered its forecast for this fiscal year by almost two%age points to 3.8%, citing "lacklustre activity in manufacturing and services" and higher interest rates that have deterred business borrowing. The organisation's latest forecast is down from the 5.6% growth for 2013 it predicted in July for Asia's third largest economy.

The IMF also warned that inflation is expected to stay high at almost 11% this year and nine% in 2014, driven by continued high food prices. India recorded five% growth last year, the slowest in a decade, and far below the "Indian Summer" of the last decade, when annual growth regularly topped eight and nine%.

The world's second most populous nation is battling stubbornly high inflation and a record current account deficit -- the broadest measure of trade -- that has pushed the local currency sharply lower. The Congress-led government is trying to turn the economy around, ahead of next year's polls, but has been mired in graft scandals and policy paralysis that have sunk its popularity and sent foreign investors fleeing.

The IMF warned that emerging Asian economies, including India, were at continued risk of a global slowdown and outflows of foreign capital from their financial markets. "Another risk is that capital outflows — due to a further tightening in US monetary conditions or deteriorating domestic fundamentals — could intensify," the IMF's report said.

Emerging markets have been hit by large outflows of foreign cash since May when the US Federal Reserve first signalled it may taper off its stimulus programme. The Fed's massive bond-buying programme saw a huge investment splurge in emerging economies when it was unveiled late last year, but the central bank is now considering winding it down.

The exodus of funds has greased the fall of India's rupee, which hit record lows in recent months before recovering some of its losses, and pushed up the price of imports, threatening already high inflation. India's inflation surged to a six-month high in August of 6.10%, strengthening the central bank's case for a freeze on interest rates, despite calls from business leaders to drop rates to help kick-start investment and boost growth.