Indian economy may contract 0.4 pc in FY21 on coronavirus pandemic, says two foreign brokerages

Two foreign brokerages on Friday predicted a contraction of 0.4 per cent of India's GDP in the current financial year due to the impact of the COVID-19 pandemic.

Japanese brokerage Nomura warned of a likely downgrade of the sovereign by global ratings agencies while American brokerage Goldman Sachs (GS) said RBI will cut rates by another 1 percentage point to arrest the economic slide.

Analysts across the board have been warning about a heavy economic toll due to the pandemic. Analysts at domestic rating agency Icra have warned of a contraction in the GDP in FY21. The agency has estimated a minus two per cent growth for the country.

 

Earlier in the day, global rating agency Moody's cut growth estimate to zero.

"We expect real GDP growth to fall to -0.5 per cent y-o-y in 2020 (vs 5.3 per cent in 2019) and by -0.4 per cent in FY21 (vs. 4.6 per cent expected in FY20)," analysts at Nomura said in a note.

GS also expects the economy to contract by 0.4 per cent and that its estimate is far below the consensus median of 2.7 per cent growth.

"We expect GDP growth of -20 per cent in Q2; while we have upgraded our expectations of recovery after mid-year, with a 10 per cent and 14 per cent q-o-q annualised GDP gain in Q3 and Q4, respectively," it said in a note.

To deal with the situation, RBI is likely to cut rates, GS said, adding that it expects 1 percentage point reduction during the year in the rates as against its earlier expectation of 0.50 per cent.

In late March, the RBI advanced its policy review meet by a week and slashed rates by 0.75 per cent to support the economy.

GS said a dip in inflation during the course of the year, despite some firmness seen early into the fiscal as people rushed to stock up during lockdowns, coupled with an unanimous call by the six-member rate-setting panel to continue with the accommodative stance of the policy will result in the deeper rate cuts.

It expects inflation to cool down to 4 per cent level, which is the central bank's target for FY21. The next scheduled bi-monthly review of the policy is in early June.

Nomura warned of a rating downgrade by Moody's, whose rating on the country is one notch above peers, and a change in outlook to "negative" by Fitch because of the ongoing troubles, saying that India is at the "cliff's edge".

"India's Achilles' heel on ratings is its parlous state of fiscal affairs and the risk of a sharp deterioration of general government debt from ~70 per cent of GDP to potentially ~75-80 per cent of GDP.

"A further risk is the deterioration in economic growth , partly intertwined with financial sector concerns," the brokerage said.

Earlier in the day, Moody's warned of the country's high fiscal deficit and high government debt as among the negative factors pushing credit risks higher.