Damage to India's economic growth is likely to be bigger than the Reserve Bank of India’s (RBI) estimates, as there could be a sharper slowdown in the near-term as cash shortage is likely to extend into the first quarter of next year, says a Nomura report.
In a research note, the Japanese financial service said:
We concur with the RBI’s view that the impact of demonetisation is likely to be transitory. However, with the cash shortage spilling over into Q1 2017, our leading indicators are pointing to a sharper slowdown in near-term growth.
Nomura further said, "As such, we expect the growth damage to be larger than the RBI's estimates".
RBI Estimate in CPI Fall: 10-15 bps; Actual Fall: 25-30 bps
The report also said November's Consumer Price Index (CPI) readings suggest that demonetisation contributed 25-30 basis points to the fall in headline CPI inflation via lower perishable item prices, slightly more than the RBI's estimate of 10-15 bps, and most core inflation measures eased by 20 bps in November.
In this backdrop, and barring any major global disruption, we believe growth and inflation readings will be supportive of policy easing.
Nomura expects the RBI to cut the repo rate by 25 bps to 6 percent in February and stay on hold thereafter, once the transitory effects start to fade.
On 7 December, RBI kept interest rates unchanged despite calls for lowering it while it slashed the economic growth projection by half a percent to 7.1 in the first policy review post demonetisation. The next monetary policy meet is on 8 February.
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