The Indian economy is expected to post a growth of 5.5 per cent in the current fiscal and at 6.5 per cent next fiscal as demand picks up, helped in large part by macroeconomic stability, Japanese brokerage firm Nomura said on Friday.
Nomura also expects inflation to decline further and settle down around 5 per cent by the end of next year. However, the Reserve Bank is expected to lower rates only in the second half of next year and that too just a 25 basis points cut, it noted.
"Our medium term view is that macro policies - both the policies that Reserve Bank of India (RBI) is likely to follow and reforms that the government is likely to announce - will lead to lesser volatility going forward and more macro stability", Nomura Economist (India), Sonal Varma said.
Despite concerns over growth not picking up and the volatility in industrial production growth and weak credit expansion, she expects India's economy to grow at 5.5 per cent in FY15 and at around 6.5 per cent in FY16.
Varma said some of the indicators suggest India was already in the initial stage of business cycle recovery and the government's focus on clearing investment projects has reduced policy uncertainty thereby helping the investment cycle to pick up.
"We are calling 2015 a Goldilocks year (high growth and low inflation) for India because while we are still in the positive direction on growth, we think inflation will continue to moderate. So, this is not another business cycle where inflation will pick up. The global financial services major expects the price rate to ease and hover around 5-5.5 per cent next year. The ease in inflation will be largely on account of domestic factors, particular fall in rural wages", Varma said.
A decline in inflation will give RBI some elbow room to decide on rate cut, she said.
"Our base line expectation is the RBI will cut rates by 50 basis points in the first half of 2015. We are penciling in April and June as the likely timing. She said the country was comfortable on current account deficit (CAD) front and expects $ 27 billion in FDI inflows in FY15. CAD is likely to be at sustainable levels of around 2 per cent of GDP this fiscal. The rupee is likely to be at 61.3 per dollar by end-2014 and 62 level by end-2015", she said.
According to Nomura, the Reserve Bank does not have to worry much on the foreign exchange position as it has accumulated enough reserves.
Authorities are backing off from their intervention stance because we think they have accumulated the reserves they wanted to accumulate, Nomura MD and Head of FX Strategy (Asia ex-Japan) Craig Chan said.