India set for ‘Goldilocks’ period; GDP to grow 6.4% in 2015: Nomura 

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New Delhi, November 25, 2014: Indian economy is set for a “goldilocks” period—used to describe a timeframe of high growth and low inflation—while it can become Asia’s fastest growing economy in 2016, Japanese financial major Nomura said. 

The global financial services major is also optimistic about “productivity-enhancing reforms” in the country and estimated the gross domestic product (GDP) growth for 2015 at 6.4%. “We are positive on India’s economic outlook in 2015. The key downside risks to our view are weaker global growth, higher commodity prices, a slower pick up in domestic capex cycle and a sharp reversal of capital inflows, especially debt inflows,” Nomura chief economist Robert Subbaraman said. 

“We expect India’s real GDP growth to rise to 6.4% in 2015, from 5.2% in 2014, and further to 6.8% in 2016,” Nomura said. Nomura’s composite leading index for India suggests that the economy has already hit its trough and is in the early stages of a business cycle recovery. 

“A Goldilocks period of lower inflation and higher growth lies ahead, in our view,” Sonal Varma, India economist at Nomura said adding “risks to India’s outlook are more global than domestic.” On reforms, the global financial services major said there would be a continued and steady rollout of reforms but in a “piecemeal” fashion and not big bang. “We expect reforms to focus on creating the groundwork for implementing a goods and services tax by April 2016; changes to the land acquisition Act; a reduction in government stake in public sector banks; a framework for auctions of natural resources; fiscal reforms and a longer-term strategy to improve railways and urban infrastructure,” Nomura said. 

“As productivity and capex improve and reforms forge ahead, we expect India’s potential growth to gradually rise again to above 6.5% in the next three to four years,” Nomura said. Despite our forecast of a solid economic recovery, the Consumer Price Index inflation is likely to average around 5.5% year-on -year in 2015, down from 7.2% in 2014. On rate cuts, the Japanese brokerage firm said that lower inflation would provide some room for policy easing in 2015. 

It expects 25 basis points (bps) rate cut in June and August 2015. “We forecast 25 bps rate cut in only Q2 and Q3 2015, and then the Reserve Bank of India stays on hold until 2017,” Nomura said. Reserve Bank of India (RBI) governor Raghuram Rajan in its September policy review left all key rates unchanged citing continued risks to inflation and difficult external situation especially on the geopolitical front. RBI’s next policy review meet is on 2 December.

Courtesy: Live Mint