India’s economic growth is likely to go up to 7.4 per cent in 2012-13, from the estimated 6.9 per cent this fiscal, as interest rates ease with fall in inflation, according to a Nomura report.

“We expect GDP growth to rise to 7.4 per cent year-on- year in 2012-13 due to lower inflation and an easing rate cycle,” Nomura said in its ‘Asia Economic Alert’

The banking major cautioned, however, that the Reserve Bank has a limited room for rate cuts and there is also some uncertainty in the government’s policies.

“Government policy remains somewhat uncertain, though some signs of improvement are already visible...,” it said.

There is likely to be some relief in the commodity prices and the RBI may go for rate cut of 100 basis points in the next fiscal, Nomura said.

“Our forecasts assume stable commodity prices and 100bp of repo rate cuts in 2012 (from April). Despite the sharp slowdown in industrial output, we expect only limited rate cuts because inflation is structurally high and fiscal policy expansionary,” it added.

Earlier this month, the Advanced Estimates released by the Central Statistical Organisation (CSO) said that growth in 2011-12 will slip to 6.9 per cent, the lowest in three years, on the back of slowdown in manufacturing and agriculture.

The economy had expanded by 8.4 per cent in 2010-11.

“A combination of tight monetary conditions, high inflation and a policy logjam has hurt investment activity and severely dampened industrial sector output growth to its lowest level in a decade,” Nomura said, while concurring with the CSO’s Advanced Estimates.

RBI hiked key policy rates 13 times, totalling 350 basis points, between March 2010 and October 2011 to tame inflation which was near double-digit during most of last two years.

India Inc has blamed the tight monetary policy, leading to increase in the cost of borrowings, for hindering investments and bringing industrial slowdown.

Besides, various economic legislations including bills to reform insurance sector and on taxation matters are stuck in Parliament due to lack of consensus between the ruling and opposition parties.

However, inflation fell to a two-year low of 7.47 per cent in December 2011 and RBI has hinted that it may go in for rate cuts if inflation remains at moderate levels for some time.

Related Topics