According to BOFA Merrill Lynch Research,
The worst is over for the Indian economy, , but recovery will drag on into the September quarter. Growth should recover to 5.4% in fiscal year 2014 from 4.6% in FY2013 on lower interest rates. Inflation should come off, providing the Reserve Bank of India (RBI) the scope to cut policy rates. They expect the INR to rule in a weak Rs60-65/USD range, with the RBI recouping FX reserves to arrest falling import cover. Expect 2014 to be a bit like 2003, with a long down cycle ending, but recovery two years away. Key risk: political uncertainty.
Expect growth to stage a weak recovery to 5.5% in FY15 and 6.5% in FY16, from 4.6%, due to lending rate cuts (Chart 20). India will bottom out at relatively higher levels than most BRICs and TIMs. In our view, India's 300bp growth slowdown can be divided into four factors: the global downturn (150bp); RBI tightening (75bp); lower capex (50bp); and poor rains (25bp).
The first half will bring poor growth and relatively high WPI inflation (Chart 21). WPI inflation should come off marginally in 1Q2014 before peaking in 2Q2014. Growth should pick up in the second half. At the same time, inflation should abate on base effects if the rains are normal.
