The Reserve Bank is likely to stay on hold in its policy review meet in October and instead focus on banking resolution and liquidity management, despite June quarter 'disappointing' GDP data, Nomura said in a report.
From the RBI's perspective, the GDP data are disappointing, but the current slowdown is largely due to GST, which should be seen as transitory, Japanese financial services major said, adding the cash-intensive sectors like trade, transportation and construction are rebounding.
The report further said the turnaround in private services suggests that the growth cycle will head higher once the GST effects fade.
"We expect the RBI to continue to expect better growth prospects in the coming quarters," Nomura said in a research note and added that inflation remains the key focus area.
Inflation is on an upward trajectory led by rising food prices, transitory effects of house rent allowance increases and an initial inflationary impact from the GST, it said.
"With this backdrop and given our view that both growth and inflation are headed higher in the next 6-9 months, we expect the RBI to stay on hold and instead focus on banking resolution and liquidity management," the report added.
The RBI reduced the repo rate by 0.25 per cent to 6 per cent earlier in August, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low.
India's economic growth slipped to a three-year low of 5.7 per cent during April-June, underscoring the disruptions caused by uncertainty related to the GST rollout amid slowdown in manufacturing activities.
Given the lower April-June quarter print, Nomura revised its full-year forecast to 6.7 per cent in 2017 (as against 6.9 per cent earlier) and noted that GDP is expected to accelerate to 7.8 per cent in 2018 (as against 7.7 per cent earlier).
"We expect GDP growth to average 7.4 per cent year-on- year in the second half of 2017 as against 5.9 per cent in first half, aided by ongoing remonetisation, restocking post GST, state pay commission hikes and lagged effects of lower lending rates.
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