India's GDP growth is likely to decelerate to 6.7 per cent in March quarter but it will gradually recover to around 7.7 per cent in 2018 supported by higher consumption and public spending, says a report.

According to the Japanese financial services major Nomura, the country's GDP growth is expected to dip to 6.7 per cent in the January- March quarter from 7 per cent in the fourth quarter of 2016.

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“However, we expect GDP to average 7.3 per cent in the second half of 2017 and 7.7 per cent in 2018 supported by higher consumption (state pay hikes, remonetisation, lower lending rates) and public spending,” Nomura said in a research note.

Regrading the “soft” industrial activity in February, Nomura said demonetisation has severely hurt industrial activity. However, this impact is expected to be 'transitory'.

India's industrial output slipped to a 4-month low, contracting by 1.2 per cent in February.

“In our view, the recovery in industrial production should gather momentum through 2017 supported by ongoing remonetisation, release of pent-up consumption demand, lower lending rates, higher public capex and impending pay hikes for state government employees,” Nomura added.

On RBI's monetary policy stance, the report said given its view of a growth recovery along with a pick-up in inflation in the second half of this year, the RBI is likely to stay on hold throughout 2017 with risks skewed towards a hike in early 2018.

The Reserve Bank in its monetary policy review meet on April 6, kept the repurchase or repo rate-at which it lends to banks-unchanged at 6.25 per cent but increased reverse repo rate to 6 per cent from 5.75 per cent.

The Marginal Standing Facility, on the other hand, has been revised downwards by 0.25 per cent to 6.5 per cent. MSF is RBI's overnight lending rate for banks against government securities.