IGI Logo

1QCY21 – India’s Quarterly Economic Outlook

Will RBI signal the end of ‘accommodative stance’?

* Mar’21 marks the one-year anniversary since the first COVID-19 lockdown. Exactly a year ago, the dreaded virus forced us to stay at home. While we were planning to clean the dust off our official attire, a second wave has hit us. Although Maharashtra, India’s largest state, is witnessing a terrible rise in COVID-19 cases, the second wave is still limited to only a few states. The lack of universality of the second wave and the experience of economic costs due to strict lockdowns has made policymakers more patient and relaxed in their actions this time. Though the hope is that the situation doesn’t go out-of-hand this time, it certainly imparts downside risks to economic projections at this stage.

* After being on track till Jan’21, the economic growth momentum has weakened in Feb’21. However, we have revised upward our FY22E real GDP growth forecasts to 11% now from 9.5% earlier, but retain our FY23E growth projection at ~4%. With the recent deceleration in retail inflation, we have revised down our headline CPI inflation forecast to 4.7%/5.4% from 5.5%/6% for FY22E/FY23E. We believe interest rates have bottomed out and that the Monetary Policy Committee (MPC) can soon shift to ‘neutral’ from its ‘accommodative stance’.

* In the absence of any adverse global shock, India’s external situation remains extremely comfortable. While the current account is expected to post a deficit in FY22E, India will continue to add foreign exchange (FX) reserves, which is expected to touch $650b by CY22E-end. It could lead to economic benefits only if RBI accepts higher-than-otherwise current account deficit (CAD), which can happen if the government expands its fiscal deficit. This appears elusive as of now. Considering the recent trends, it is very likely that the total receipts of the Government of India (GoI) will outpace their revised estimates by almost INR900b (or 0.5% of GDP). Assuming unchanged fiscal spending, GoI’s fiscal deficit in FY21E could end up being closer to 9% of GDP, rather than the estimated 9.5%.

Changes in economic forecasts since Dec’20
Real GDP: Due to downward revision in the base (3QFY20), India’s real GDP grew 0.4% YoY in 3QFY21. Although better accounting is expected to lead to a decline in real GDP in 4QFY21, we have revised our forecasts upward/downward for FY22E/FY23E to 11.1%/4% (from 9.5%/4.2% earlier).

CPI inflation and interest rates: With inflation falling below 5% over the past three months (Dec’20-Feb’21), we have revised our headline CPI inflation forecasts downward to 4.7%/5.4% for FY22E/FY23E from 5.5%/6% earlier. As it remains above the 4% target, we believe that interest rates have bottomed out and MPC can soon shift to ‘neutral’ from its ‘accommodative stance’.

Exchange rate: Although the accretion to FX reserves in FY21-23E is expected to be lower than previously estimated, India’s reserves stock will touch $650b by CY22Eend. We, therefore, keep our currency forecasts unchanged.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer