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Supported by better investor sentiment, India's GDP growth rate is expected to strengthen further, while inflation is likely to ease in the coming quarters due to base effects, says an HSBC report.
Improved investor sentiment is expected to drive the economy forward in the coming quarters. In order to support the recovery process, the new government, however, would need to pick up the pace of reforms, the global financial services major said.
"Looking ahead, growth is likely to strengthen, supported by better sentiment, whereas inflation will ease notably due to base effects," HSBC said in a research note today.
India's economic growth accelerated to 5.7% in April-June quarter, much better than 4.7% in the same quarter of previous fiscal.
Government expects growth in current fiscal to be between 5.4-5.9%. The economy grew by sub-5% in 2012-13 and 2013-14.
On growth, the report further noted that some of the factors that can impact growth revival momentum are -- poor start to monsoons, high corporate leverage and fiscal compression needed to achieve the budget deficit target.
"To support the recovery, the new government will need to pick up the pace of reforms and quickly address supply side issues in the economy," HSBC said.
Notwithstanding the improved prospects for inflation, the RBI is likely to keep the policy rate unchanged in the near term, in order to contain CPI \to under 6% by January 2016.
CPI inflation moderated to 7.8% year-on-year in August (as against 8.0% year-on-year in July). The wholesale inflation also fell to a nearly five year low of 3.74% in August.
The report further noted that meeting the CPI target of 6% by 2016 would prove "challenging" since stronger growth can lift price pressures next year.
In order to meet this target (CPI target of 6% by 2016) the Central Bank would probably choose to leave policy rates at the current "elevated" level, HSBC said.
"From the RBI's perspective, it will have to retain its tight monetary policy stance to ensure sustained disinflation next year, when growth gains momentum," it said.
