Demonetisation impact to linger till Q2 of next fiscal: Nomura

Factors that can push growth include softer interest rates, increased banking sector liquidity, higher rural consumption, salary hikes for state government employees and greater traction in public capex

The economy would stabilise in the March quarter, but the heavy impact of demonetisation means growth can accelerate only in the second quarter of the next financial year, says a report.

"While leading indicators point to a stabilisation in the first quarter of 2017, demonetisation is likely to exacerbate the near-term slowdown due to temporary cash shortage. Pre-demonetisation data suggest activity is likely to stabilise in the first quarter," Japanese brokerage Nomura said in a note, on Monday, adding that consumption is the "brightest spot" for the economy.

"Due to a temporary cash shortage, we see a risk that GDP growth could slow to 6.5 per cent in the fourth quarter of 2016 against our current estimate of 7.3 per cent, and to 7.5 per cent in the first quarter of 2017 from 7.9 per cent," it said.

"Once the shortage of banknotes in a predominantly cash economy eases, the availability of cash coupled with other factors will result in a faster clipped growth from the June quarter."

The other factors that can push growth include softer interest rates, increased banking sector liquidity, higher rural consumption, salary hikes for state government employees and greater traction in public capex.

There have been lower growth rate projections by analysts and brokerages following the government's surprise move to decommission Rs 500 and Rs 1,000 notes to curb black money and currency counterfeiting.

Photograph: Reuters