A report by Bank of America Merrill Lynch has made a dim forecast on the economic environment of India post demonetisation, predicting a sharp fall in growth for the quarter ending this month (December).
According to the report, India’s economic growth may slip to 5.5-6% in the current quarter as demonetisation is expected to hurt production during November-December.
“We expect demonetization to hurt production in November-December. Each month of disruption hits growth by 0.3-0.5% of GDP,” BofA-ML said in a research note, adding that post note ban, discretionary demand has been badly affected.
The global financial services major reported that the Reserve Bank of India is expected to go for a 25 bps rate cut in its February 8 policy review meet after industrial production contracted by 1.9% in October.
RBI in its December policy review meet surprised with a status quo on policy, largely premised on upside risk to January-March quarter inflation and limited transient growth drag owing to demonetization.
On December 7, RBI kept interest rate unchanged, while it slashed the economic growth projection by half a% to 7.1 in the first policy review post demonetization. Even as RBI sharply lowered its real GVA forecast for financial year 2017 by 50 bps to 7.1%, it noted that the revision is largely owing to the downside surprise in the second quarter of this fiscal.
The next monetary policy meet scheduled on February 8. Moreover, RBI is expected to adopt an accommodative policy stance largely owing to weak IIP data, demonetization and its impact on growth, and moderating inflation.
BofA-ML expects CPI inflation to be at 4% in November and 5% in financial year 2018, consistent with the RBI’s 2-6% inflation target.
On Fed Rate hike, the report said the US recovery is positive for India for the medium term as this boosts exports demand and supports growth. Fed rate hikes will continue to rein in global commodity prices that helps stabilize India’s ‘imported’ inflation, it noted.
(With agencies inputs)