India is expected to clock a GDP growth of 6.9 per cent this fiscal, which is likely to recover to 7.2 per cent in 2017-18, says a Bank of America Merrill Lynch (BofAML) report.

“Looking ahead, we expect growth to end 2016-17 at 6.9 per cent and recover to 7.2 per cent in 2017-18, partly on base effects of the ongoing demonetisation shock,” BofAML said in a research note, adding that this rate of growth is still higher than other BRICs.

The government had on February 28 pegged GDP growth at a higher-than-expected 7.1 per cent for the current fiscal.

The Central Statistics Office (CSO) has put the growth rate for October-December — the quarter in which the government banned 86 per cent of the currency in circulation — at 7 per cent compared with 7.4 per cent in the second quarter and 7.2 per cent in the first quarter.

The global financial services major said rate cuts hold the key to recovery and expects a 50-70 bps reduction in lending rates by banks by September.

“We expect bank lending rates to come off by 50-75 bps in the April-September slack industrial season with the RBI committing to push liquidity in the money market into neutral by March 2018,” BofAML said.

The report noted that rather than reforms, lending rates are needed for a cyclical recovery.

“While reforms could push up potential over, say, five years, the immediate challenge is to get back to current potential growth (7 per cent BofAML estimate),” BofAML said.

Open market operations

The report further said the key catalyst for recovery lies in RBI open market operations (OMOs) that will ease borrowing rates. “We assess RBI OMO at Rs 2,200 billion in 2017-18,” it added.

OMOs are market operations conducted by RBI by way of sale and purchase of government securities to and from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis

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