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2QCY21 – India’s Quarterly Economic Outlook

Will RBI signal the end of the ‘accommodative’ stance?

* Unlike the first wave, wherein the central government implemented a national lockdown in 1QFY21, the responsibility of managing the second wave was handed over to the states/territories. This resulted in regional restrictions almost across the country in Apr/May’21. Although the lockdowns have continued in Jun’21, the number of daily COVID cases and the positivity rates has fallen significantly in the past month or so.

* Therefore, while the economic momentum has been disturbed in 1QFY22, the extent of economic loss would be modest v/s 1QFY21. Accordingly, we have revised down our real GDP growth forecasts for 1HFY22 and, thus, for FY22. With some pent-up demand and a favorable base, growth has been revised up marginally for 2HFY22 and FY23. Furthermore, while real GDP growth has been revised down, nominal GDP growth forecast has been revised up moderately owing to higher GDP deflator.

* Moreover, notwithstanding weak economic activity, we believe an adequate cushion is built into the FY22 budget estimates (BEs). Accordingly, the government may be able to meet its FY22 fiscal deficit as well as spending target.

* Lastly, the Indian rupee (INR) moved from 72.5 against the US dollar (USD) in mid-Mar’21 to over 75/USD in midApr’21. The currency pair has retreated to 73 in the past few weeks. As mentioned in our previous QEO note, India’s external situation remains extremely comfortable. However, higher US inflation may make the global markets jittery, creating a weakening bias in the INR. Thus, the INR may see some weakness in the very near term and end the year at around 74.5/USD. We revise the USDINR marginally upwards to average 73.8 in FY22.

Changes in economic forecasts since Mar’21 Real/Nominal GDP:

Real GDP growth has been revised down from 11.1% to 8.7% for FY22, primarily due to cuts in 1HFY22. The real growth forecast has been revised up to 5.4% for FY23, vis-à-vis 4% projected earlier. Interestingly, though, a higher GDP deflator drives nominal GDP growth marginally higher to 15.6% in FY22.

CPI inflation and interest rates:

WPI-based inflation is expected to surge in FY22, partly on account of a rise in industrial metals and base effect. On the other hand, CPI-based inflation is likely to ease slightly to 5.7% in FY22, down from 6.2% in FY21. As it remains above the 4% target, we believe interest rates have bottomed out and MPC could shift to ‘neutral’ from its ‘accommodative’ stance by the year-end.

Exchange rate:

India remains extremely comfortable on its external account. However, with the US CPI inflation rising to 5%, the global financial markets may become jittery, creating weakening pressures on the INR. Consequently, we revise the USDINR marginally upwards to average 73.8 in FY22.

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