New Delhi: India’s real gross domestic product (GDP) growth is expected to slow to 6.5% 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% in the next financial year.

Prime Minister Narendra Modi on 8 November had announced the demonetisation of Rs500 and Rs1,000 notes, thereby withdrawing 86% or Rs14 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 demonetisation initiative," said the note, adding that the GDP will slow to 6.5% in 2016-17, and gradually recover to 7.5% 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 Reserve Bank of India (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%, with the recovery likely to be more back-ended," Deutsche Bank added.

The global brokerage expects consumer price index (CPI) inflation to average under 5% 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 7 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 (MPC) headed by RBI governor Urjit Patel last month cut benchmark interest rates by 0.25% to 6.25%. The next RBI policy review is on 7 December.

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