The Reserve Bank of India (RBI) is likely to cut the repo rate by 25 basis points (bps) after the Budget 2016, at its policy meeting in April, beyond which the central bank is expected to stay on hold, says a Nomura report.
According to the Japanese brokerage firm, gross value added (GVA) growth has marginally undershot the RBI’s 7.4% projection in the financial year 2015-16, supporting the case for a rate cut.
“In our baseline, we believe the RBI will cut the repo rate by 25 basis points in the April policy meeting after the Budget 2016. Beyond that, we expect the RBI to stay on hold and shift its focus to policy transmission,” it said in a research note.
The quality and quantum of fiscal consolidation and supportive structural reforms in the Budget 2016 are now keys to watch, it added.
The global brokerage firm reported that though the Gross Domestic Product (GDP) data suggests that India’s growth cycle has accelerated in the financial year 2015-16, driven primarily by rising private consumption demand and steady public investment growth, there remains a “disconnect between GDP and real data”.
According to data from the Central Statistics Office (CSO), the economy is expected to grow at a five-year high of 7.6% in the current fiscal. The CSO data showed that the economy grew at 7.6% in the first quarter, 7.7% in the second and 7.3% in the third quarter.
“We expect GDP (market prices) growth to pick up moderately to 7.8% in FY17 (year ending March 2017) from 7.6% in FY16, indicating a slow and steady upcycle,” Nomura said.
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The factors that are likely to support growth recovery include low commodity prices, low inflation, wage hikes owing to the forthcoming 7th pay commission and a normal monsoon.
However, “the pace of recovery is likely to be slow, because of weak private sector investment and stagnant external demand,” it added.