The worst is over for the Indian economy but it will be another six months before the country shows signs of improvement and growth recovers to 6.5 per cent level, Bank of America Merrill Lynch has said in a report.
According to BofA-ML, lead indicators still point to six months of pain and it is not until the March quarter that growth is expected to recover to 6.5 per cent levels.
"We grow more confident of our call that while the worst is over, recovery will stretch for another 6 months," the report said.
While reforms are a medium-term positive, immediate revival will surely depend on lending rate cuts.
A turn-around in loan demand is critical for recovery and high lending rates are still pulling down credit, the report said.
"High lending rates, are still pulling down credit, our other key lead indicator. Unless lending rates come off, FY13 growth will likely find it difficult to do our 5.6 per cent forecast, let alone the Reserve Bank of India's 6.5 per cent,"
It expects RBI to cut cash reserve ratio by 50 basis points to pull down lending rates.
The report further noted that India is likely to bottom out at higher levels than Brazil and Russia.
There are, three 'faint-and-flickering' rays of hope for a March turnaround.
Firstly, trade credit -- advances to traders -- has bottomed out; secondly, north Indian reservoirs that water the winter wheat crop have recovered and thirdly, risk aversion is topping off.
In addition, the three key concerns for risk aversion -- Greek exit from euro-zone, drought and policy paralysis in Delhi -- are receding now.
The government has recently taken a number of reform initiatives like opening foreign direct investment to multi-brand to retail sector, aviation and broadcasting sector, hiking diesel prices, capping the number of subsidised liquefied petroleum gas cylinders.
Moreover, the government has unleashed a second wave of reforms deciding to open the pension sector to foreign investment and raising the FDI cap in insurance to 49 per cent.
