India’s growth momentum witnessed a recovery in January but it is not broad-based and overall economic activity remains below pre-demonetisation levels, says a Nomura report. The slowdown that started in the October-December quarter of 2016, post the demonetisation is spilling over into the first quarter of 2017 (January-March). “Overall, Nomura’s economic heat-map and proprietary indices indicate that activity has weakened sharply in December and, while January looks incrementally better, it is not yet broad-based and activity remains below pre- demonetisation levels,” Nomura India Chief Economist Sonal Varma said in a research note. The report further noted that the process of remonetisation appears to be progressing well and transaction demand is expected to stabilise by the end of March. “Currency in circulation stood at 7.2 per cent of GDP as on February 10, up from a low of 5.9 per cent on January 1 and we expect a ratio of close to 9 per cent by the end of March, which should help stabilise transaction demand,” Varma added.
Nomura expects GDP growth to slow from 7.3 per cent in third quarter (July-September) of 2016 to 6.0 per cent in Q4 (October-December) and to 5.7 per cent in Q1 (January-March) 2017.
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Moreover, growth is expected to bounce back to an average of 7.5 per cent in the second half of 2017 and 7.7 per cent in 2018 driven by lower lending rates, pay hikes for state government employees and higher government spending on rural and infrastructure sectors.
Nomura expects inflation of around 4.0-4.5 per cent in first half of 2017 before rising to a much higher 5.5-6.0 per cent in second half of 2017.
“For now, we expect rates to be left unchanged throughout 2017, but with the inflation target set at 4 per cent – which we do not believe will be achieved in 2017-18 – and global factors also adverse, we see the probability of a rate hike as low but rising,” it added.