India reached inflection point, economy may recover in 2015: Nomura

Nomura, the Japanese broking house, said India has reached an "inflection point" and the economy is likely to recover in 2015.

"From a medium-term perspective, India, to us, seems to be at an inflection point.

"As a house, we were quite concerned on the macro situation from the last two-three years, but there are number of factors that are falling in place which suggest that we are at the starting point of the more medium-term pick up on the growth front," Nomura Financial Advisory and Securities economist Sonal Ms Varma said.

She said that one of the reasons for the country to be at an inflection point is that there is a greater confidence that the macro-economic system is becoming much more stable.

"At the bottom of the business cycle, we have both monetary and fiscal policies which are tight. As a result of which consumption demand is a bit weaker and simultaneously you have a government which is pushing investments so as to boost productivity and investments," Ms Varma said.

Nomura believes that slowdown in the country's growth cycle has come to an end and GDP growth is likely to rise from 4.5 per cent in 2013 to 4.7 per cent in 2014 and 6.3 per cent in 2015.

"From a fiscal year perspective, we are expecting real GDP growth of 5 per cent this year. Obviously, lower agriculture growth will be offset to some extent by better non- agricultural activity," Ms Varma said, adding that the GDP growth will pick up to 6.5 per cent in FY'16.

She said the pick-up in the growth is not driven by some temporary stimulus measure like a rate cut.

"Growth cycle is picking up despite policies being tight and therefore the pick-up in the growth cycle will be gradual and it also makes it much more sustainable," Ms Varma noted.

She said in the course of next three to four years, potential growth of the country is likely to be 6.5-7 per cent as against 6 per cent now.

The brokerage house expects retail inflation or CPI to moderate over the next two years to under 8 per cent by the first quarter of 2015 and around 6 per cent by the first quarter of 2016.

Ms Varma also said that the Reserve Bank will only cut rates if inflation eases below 6 per cent.

"Our interest rate forecast is that RBI will stay on prolonged pause until end of 2015. We are building rate cut starting early 2016," Ms Varma said.

The Reserve Bank in its third bi-monthly monetary policy, announced yesterday, left the repo unchanged at 8 per cent and reverse repo rate 7 per cent.

Nomura said even as gold restrictions are removed, the current account deficit will remain sustainable level of below 2 per cent of GDP in the current fiscal.

It expects $60-65 billion of inflows this fiscal with $25 billion coming from portfolio investors, $20 billion from foreign direct investment and $10 billion through external commercial borrowing route.

Nomura sees the rupee at 58 level by end 2014 and 56.5 against the dollar by end-2015.

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Story first published: Thursday, August 7, 2014, 9:20 [IST]
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