The worst is over for the Indian economy but it will be another six months before the country shows signs of improvement and growth recovers to 6.5 per cent levels, Bank of America Merrill Lynch has said in a report.
According to BofA-ML, lead indicators still point to six months of pain and it is not until the March quarter that growth is expected to recover to 6.5 per cent levels.
“We grow more confident of our call that while the worst is over, recovery will stretch for another six months,” the report said.
While reforms are a medium-term positive, immediate revival will surely depend on lending rate cuts. A turnaround in loan demand is critical for recovery and high lending rates are still pulling down credit, the report said.
“High lending rates are still pulling down credit, our other key lead indicator. Unless lending rates come off, FY’13 growth will likely find it difficult to do our 5.6 per cent forecast, let alone the RBI’s 6.5 per cent,” BofA Merrill Lynch said.
It expects the RBI to cut the Cash Reserve Ratio by 50 basis points to pull down the lending rates.
The report further noted that India is likely to bottom out at higher levels than Brazil and Russia.
There are three “faint-and-flickering” rays of hope for a March turnaround. Firstly, trade credit — advances to traders — has bottomed out; secondly, north Indian reservoirs that water the winter wheat crop have recovered and thirdly, risk aversion is topping off.
In addition, the three key concerns for risk aversion — Greek exit from euro zone, drought and policy paralysis in Delhi — are receding now.
The Government has recently taken a number of reform initiatives like opening up FDI in multi-brand retail sector, aviation and broadcasting sectors, hiking diesel prices, and capping the number of subsidised LPG cylinders.
Moreover, the Government has unleashed a second wave of reforms by deciding to open the pension sector to foreign investment and raising the FDI cap in insurance to 49 per cent.