'Industrial recovery to be gradual, 2016 GDP growth at 7.8%'

Sharp contraction in factory output is just an aberration, says Nomura

Sharp contraction in factory output is just an "aberration" and underlying industrial growth is still positive, Nomura has said in a research note, adding that the country is expected to clock a GDP growth of 7.8 per cent in 2016.

According to the global financial services firm, the contraction in industrial production was significantly below expectations and the December industrial production growth should rebound.

Industrial production contracted 3.2 per cent in November, its sharpest decline in four years.

"Given rising external headwinds, the industrial recovery is likely to remain gradual. Still, we expect India's GDP (market prices) growth to rise to 7.8 per cent in 2016 from 7.3 per cent in 2015...," Nomura said in a research note.

The report noted the gradual rise in growth numbers would be largely led by low commodity prices (which is positive for corporate profits), improving discretionary demand, gradual transmission of past rate cuts and higher public investment in infrastructure.

Moreover, normal monsoon in 2016 should also support rural demand.

"December industrial production growth should rebound, but the Chennai flood effect will also partly weigh on industrial output," Nomura said in the research note.

The report further noted "the sharp contraction in industrial production is an aberration, as underlying industrial growth is still positive, though industrial production growth appears to have lost some momentum towards the end of 2015."

On growth, Nomura said: "We expect India's GDP (market prices) growth to rise to 7.8 per cent year-on-year in 2016 from 7.3 per cent in 2015".

Nomura expects CPI inflation to average 5.4 per cent in 2016, versus 5.8 per cent earlier.

"Excluding the one-off technical rise (due to pay commission), we expect underlying CPI inflation to be stable at 5 per cent in 2016," it said.

On monetary policy, it said that RBI is likely to go for a 25 basis point repo rate cut to 6.50 per cent, owing to lower commodity prices and slower industrial momentum.

"Although an inter-meeting cut cannot be ruled out, our base case is for an April cut. Beyond that, we expect the RBI to stay on hold as there are upside risks to its medium-term inflation target," it said.

Reserve Bank's next bimonthly policy review is on February 2.