Despite the second wave of Covid infections that has crippled economic activity in most cities in recent months, Nomura has raised India’s gross domestic product (GDP) forecast for 2022 by 0.7 points percentage (pp) to 7.7 percent. That aside, the research and brokerage house revised forecasts for consumer price inflation (CPI) and current account deficit.
“We are increasing our current account (CA) deficit forecasts for 2021 and 2022 to 1.5% and 1.3% of GDP, respectively (from 1.1% and 0.8%), and inflation from l ‘CPI at 5% and 5.3% (from 4.9% in both years). We also forecast a further 25bp repo rate hike in the third quarter of 2022, ”wrote Sonal Varma, Managing Director and Chief Economist for India at Nomura, in a recent note co-authored with Aurodeep Nandi .
The first wave of growth indicators for May, according to Nomura, suggests a significant impact on consumption and services, with the manufacturing and exporting sectors more resilient. The overall impact, according to Varma and Nandi, turns out to be less than that of the first wave. Downside risks, however, include a third wave, a slower pace of vaccination, capital outflows and rising commodity prices. Risks on the rise include a faster rate of vaccination.
“The dip in ultra-high frequency indicators at the end of May and the reopening measured across states suggest the worst may be over, although growth is only expected to increase gradually in June,” Nomura said.
GDP, according to their estimates, is expected to contract by 4.3% qoq in the second quarter, much less than in the first wave (-24.7%). Beyond the second quarter, favorable winds such as strong global growth, increased pace of vaccination, easy financial conditions, and prominent fiscal activism are expected to help GDP growth reach 9.8% in 2021 and 7.7% in 2022, Nomura said, and forecasts 50% of India’s population to be vaccinated by the end of 2021.
This, however, is in stark contrast to those in Jefferies, who expect only 32% of Indian citizens to be fully vaccinated by the end of the year.
“Major US / UK / Israel vaccinators are showing signs of capping at an early dose rate of 52 percent / 60 percent / 60 percent of the population. At these rates, the US / UK / Israel saw a marked decrease in daily deaths from respective peaks in late Jan-2021. India, with its diverse population and poor infrastructure outside of cities, will struggle to quickly hit those vaccinated numbers, ”Jefferies analyst Abhishek Sharma wrote in a recent memo.
Meanwhile, Nomura expects policy normalization to begin in Q4-2021, with liquidity normalizing and a 40 basis point (bps) hike in the repo rate. “We now expect a cumulative 75bp of repo rate hikes in 2022, given higher inflationary pressures,” they said.