Economic slump to deepen; India FY21 GDP can contract 6%: BofA Securities

BofA Securities expects the monetary policy committee of the RBI to slash policy rates by 100bp in FY21 as their base case

Surging Covid-19 cases and the ensuing re-lockdown in many states is making economists more pessimistic about a full-fledged economic recovery in India. In their July 26 note, analysts at BofA Securities now expect the Indian economy – as measured by the gross domestic product (GDP) – to contract 6 per cent in financial year 2020-21 (FY21) as their base case.

“We expect FY21 GDP contraction to deepen by 200 basis points (bp) to 6 per cent with rising Covid-19 cases set to push current restrictions by two months to mid-November, with the restart taking up to December. We estimate that a month of lockdown costs 100bp of annual GDP. If the global / Indian economy has to wait for a vaccine to normalise, we expect FY21 GDP contraction by our bear case 7.5 per cent,” wrote Indranil Sen Gupta, India Economist at BofA Securities in a July 26 co-authored report with Aastha Gudwani.

In this backdrop, BofA Securities expects the monetary policy committee (MPC) of the Reserve Bank of India (RBI) to slash policy rates by 100bp in FY21 (earlier expectation: 75bp) as their base case, with inflation set to slip to 2.5 per cent in the second half of the fiscal (H2FY21) from 6.3 per cent in July. That apart, they expect the government's overall fiscal deficit to rise.

“Lower activity will likely push up the Center's fiscal deficit by 15bp to 7 per cent of GDP and the overall fiscal deficit by 50bp to 11.2 per cent. In order to contain yields, the RBI will need to step up open market operations (OMO) to $105 billion in FY21,” BofA said.

However, in their worst-case scenario where the world and India have to wait for the Covid-19 vaccine, Gupta and Gidwani expect the RBI MPC to cut rates by another 200bp from the current levels in FY21. “Falling growth should push up the overall fiscal deficit by another 100bp to 13 per cent of GDP. This, in turn, will be largely funded by RBI OMO,” they said.

Analysts at Nomura, too, echo a similar view and peg the India’s GDP contraction at 6.1 per cent in FY21 in the backdrop of slowing economy and a rise in Covid-19 cases. They, however, expect the RBI to hold rates in its upcoming policy meeting in the first week of August.

“We expect Q2 (Apr-Jun) to mark a likely GDP growth nadir, at -15.2 per cent y-o-y from 3.1 per cent in Q1. Subsequently, we expect GDP growth to remain in negative territory for the next three quarters (-5.6 per cent in Q3, -2.8 per cent in Q4 and -1.4 per cent in Q1 2021), averaging -5 per cent y-o-y in 2020 and -6.1 per cent in FY21," wrote Sonal Varma, managing director and chief India economist at Nomura in a July 20 co-authored report with Aurodeep Nandi.

Given the resumption of lockdown in several states in the backdrop of rising Covid-19 cases, those at CARE Ratings now assume that two-third of the economic sectors would operate at 50-70 per cent capacity by the end of the third quarter (Q3-CY20) and the balance may not even reach this state this year.

“It is assumed that good rural income cannot compensate for this loss of purchasing power which is topped with uncertainty. Also, in this scenario a direct fiscal stimulus has been ruled out for the year. If, however, there is a surprise package, then the forecast could change. Given this, our forecast for GDP growth is now -6.4% for FY21 with GVA (de)growth estimated to be around -6.1%," says Madan Sabnavis chief economist at CARE Ratings.