India's real GDP growth is expected to slow to 6.5 per cent in the current fiscal on the likely impact of demonetisation, while muted inflation may open room for additional rate cuts, says a Deutsche Bank report.
According to the global financial services major, economic growth will see a moderation in the near term and would gradually recover to 7.5 per cent in the next financial year.
Prime Minister Narendra Modi on November 8 had announced the demonetisation of Rs 500 and Rs 1,000 notes, thereby withdrawing 86 per cent or Rs 14 lakh crore worth currency from circulation.
"We expect growth to be impacted adversely in the present and next quarters due to the government's temporary de- monetisation initiative," said the note, adding that GDP will slow to 6.5 per cent in 2016-17, and gradually recover to 7.5 per cent in 2017-18.
According to the report, the government is expected to increase public spending from the next fiscal year to offset the likely lingering impact of a slower growth in the informal economy.
Moreover, the RBI is also likely to keep monetary policy accommodative for a prolonged period, which will help private consumption to recover once again in the next fiscal year, especially in the second half.
"This could help push up FY18 real GDP growth to about 7.5 per cent, with the recovery likely to be more back-ended," Deutsche Bank added.
The global brokerage expects CPI inflation to average under 5 per cent both in 2016-17 and 2017-18, opening up considerable additional room for rate cuts.
"Given the growth-inflation outlook, we have pencilled in 25 bps cut at the 7th December meeting and another additional 50 bps rate cut for the next year. We expect the RBI to cut rates in February (post the Union Budget) and in April (annual policy meeting) by 25 bps each," the report said.
The Monetary Policy Committee headed by RBI Governor Urjit Patel last month cut benchmark interest rates by 0.25 per cent to 6.25 per cent. The next RBI policy review is on December 7.
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