India GDP may slump to 5% in Dec quarter following demonetisation

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New Delhi: India’s GDP is likely to have grown at a much slower-than-expected pace of 5% in the October-December period and may see a 6% growth in the following quarter due to a slow down in manufacturing and services sectors post demonetisation, says an HSBC report.

According to the global financial services major, activity data across manufacturing and services as well as consumption and investment have clearly taken a hit after 8 November, when the government announced scrapping old Rs500 and Rs1,000 notes.

“We expect GDP to grow 5.0% in the October- December quarter and 6.0% in the January-March quarter, about 2 percentage points lower than we had expected before the demonetisation was announced,” HSBC said in a research note.

Post the March quarter, the economic growth is expected to normalise gradually towards the 7% level, it added. “Thereafter (after January-March period), we expect growth to normalise gradually towards the 7% ballpark, but remain shy of the 7.5%-8% range in FY18, due to adjustment costs that businesses and consumers face, in the process of formalisation and digitisation,” the report added.

The Reserve Bank is expected to adopt an accommodative policy stance to spur growth. “On the back of our expectation of lacklustre investment growth, we expect the RBI to deliver a 25 bps rate cut in the February meeting,” HSBC said. On 7 December, the central bank kept interest rate unchanged despite calls for lowering it and also lowered the economic growth projection by half a percentage point to 7.1% in the first policy review post demonetisation. The central bank will hold its next monetary policy meet on 8 February.