Demonetisation effect: Expect RBI to cut repo rate by 25 bps to 6%, says Nomura

GDP data suggest that the economy experienced robust aggregate momentum before the demonetisation shock hit.

Written by Nomura

December 2, 2016 06:13 IST

RBI said the impact of demonetisation should ebb with the progressive increase in the circulation of new currency notes and greater usage of non-cash based payment instruments in the economy. (PTI)

GDP data suggest that the economy experienced robust aggregate momentum before the demonetisation shock hit.
However, even then, the recovery was narrow-based with consumption the only growth engine, investment weak and the non-agriculture sectors slowing.

We expect the cash shortage triggered by demonetisation to last until January and GDP growth to slow to 6.5% in Q4 and to remain subdued at 7% in Q1 2017.

However, once the cash shortage eases, we expect a gradual recovery to take hold in H2 2017, owing to a boost to government fiscal finances and improved banking system liquidity. However, in the light of the near-term growth slowdown, we are bringing forward our rate cut call and we now expect the RBI to deliver a 25-bps repo rate cut to 6% next week (on December 7).

India’s GDP growth accelerated to 7.3% y-o-y in Q3, better than 7.1% in Q2, but marginally below expectations (Consensus and Nomura: 7.5%). GVA growth moderated to 7.1% from 7.3% in Q2, also below expectations.

This article was first uploaded on December two, twenty sixteen, at thirteen minutes past six in the morning.