India’s economic growth may slip to 5.5-6 per cent in the current quarter as demonetisation is expected to hurt production during November-December, says a Bank of America Merrill Lynch report.

“We expect demonetisation to hurt production in November-December. Each month of disruption hits growth by 0.3-0.5 per cent of GDP,” BofA-ML said in a research note, adding that post note ban, discretionary demand had been badly affected.

The global financial services major reported that the Reserve Bank of India is expected to go for a 25 bps rate cut in its next policy review on February 8 as industrial production contracted by 1.9 per cent in October.

The RBI in its December policy review meet surprised markets with a status quo on policy, largely premised on upside risk to January-March quarter inflation and limited transient growth drag owing to demonetisation.

On December 7, the RBI kept interest rate unchanged, while it slashed the economic growth projection to 7.1 in the first policy review post demonetisation.

Even as the RBI sharply lowered its real GVA forecast for financial year 2017 by 50 bps to 7.1 per cent, it noted that the revision is largely owing to the downside surprise in the second quarter of this fiscal.

Moreover, the RBI is expected to adopt an accommodative policy stance largely owing to weak IIP data, demonetisation and its impact on growth, and moderating inflation.

BofA-ML expects CPI inflation to be at 4 per cent in November and 5 per cent in financial year 2018, consistent with the RBI’s 2-6 per cent inflation target.

On Fed Rate hike, the report said the US recovery is positive for India for the medium term as this boosts exports demand and supports growth.

Fed rate hikes will continue to rein in global commodity prices that helps stabilise India’s ‘imported’ inflation, it noted.

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