'Gradual recovery in economy, neutral near-term policy stance likely'

New Delhi: The Indian economy is expected to witness gradual recovery with growth likely to bounce back to an average of 7.5 percent in the second half of this year and 7.7 percent in 2018, says a Nomura report.

According to the Japanese financial services major, the country is going to see gradual recovery from demonetisation, led by exports and a remonetisation-led pick-up in urban consumption and transportation services.

"The recovery is still uneven, with urban consumption rebounding faster than cash intensive rural consumption and manufacturing reverting faster than services, which could be due to the ongoing export recovery," Nomura said in a research note.

The Nomura Composite Leading Index (CLI) suggests that non-agricultural GDP growth will revert to pre-demonetisation levels once the cash injection is sufficient.

Besides, easier financial conditions and stronger external demand should support growth once remonetisation is complete.

"We expect GDP growth to slow from 7 percent in the fourth quarter of 2016 to 6.7 percent in January-March 2017 as activity is yet to recover to levels seen prior to demonetisation.

"However, we expect growth to bounce back to an average of 7.5 percent in the second half of 2017 and 7.7 percent in 2018," Nomura said.

Regarding the RBI's policy stance, the report said key policy rates are expected to be on hold this year.

"We expect policy rates to remain on hold in 2017, but given our expectation of higher inflation of 5.5-6 percent by October-December 2017, we expect the RBI to hike by a cumulative 50 bps in 2018," it noted.

The Reserve Bank in its monetary policy review meet on April 6 kept the repurchase or repo rate -- at which it lends to banks -- unchanged at 6.25 percent but increased reverse repo rate to 6 percent from 5.75 percent.