Until last month, international agencies such as the IMF expected the economy to contract by 10%. the RBI It is expected to continue its accommodative stance, keep liquidity in surplus without actually cutting rates, given that credit growth remains negative, but is expected to remain at its policy rate in its post-monetary policy statement.
Nomura has improved the GDP forecast for fiscal year 21 to -8.2% from -10.8%. Most agencies have raised their projections over the weekend, while others are expected to do so this week.
“The result is likely to trigger strong improvements in consensus estimates for full-year GDP, including that of the RBI which had contracted more than 9% for the same period when it detailed its quarterly projections in October,” he said To Prasanna and Abhishek Upadhyay of ICICI Securities in a report. They noted that the RBI had forecast a sharp contraction of 5.6% even in the October-December period, and a reasonably strong improvement is likely also plausible for that estimate based on high-frequency data in the current quarter.
Although the RBI is expected to maintain the status quo on rates, liquidity is expected to be in surplus due to a record purchase of dollars by the central bank to keep the exchange rate under control.
Furthermore, the demand for credit has not recovered. Despite the holiday season that boosted demand for home loans and personal loans in October, lenders’ outstanding loan portfolio remains below late-March 2020 levels as large companies have reduced their dependence of bank loans. However, weekly data shows that loan growth finally turned positive in November.
According to SBI group chief economist Soumya Kanti Ghosh, one of the drivers of the rally has been manufacturing growth. However, he believes that much of the improvement is due to cost savings, especially wages, which could have implications for consumption.
“The second quarter GDP reading suggests that the output gap has not been corrected to the point that it will be a concern about demand inflation. In addition, inflationary pressure on agricultural products despite expanding production has further limited the policy option. The option must move towards a continuous flexibility in the mobility of goods and give a massive boost to the construction and infrastructure sector. It should focus more on increasing the ease of doing business and private sector engagement, ”Ghosh said.
According to Care Ratings chief economist Madan Sabnavis, the gain in the second quarter was driven by the manufacturing, electricity and agriculture sectors. “Contact-intensive service sectors continue to register a contraction in growth rates both annually and quarterly,” he said. Sabnavis also said that India lags behind other countries that have reported GDP figures.
“In terms of size, the national economy shrank to the level of December 2017. Furthermore, India lags behind other major economies in terms of recovery during July-September 2020 … However, growth here has been greater than that of Spain (-8.7%) and the United Kingdom (-9.6%), ”Sabnavis said in a note.
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