This comes at a time when India reported better-than-expected Q4FY21 GDP numbers. But during the first quarter of FY22, many states went under lockdown to control the raging pandemic, arousing fear that economic numbers for the quarter could be down in the dumps.
“Although the second wave will likely constrain sequential growth momentum in Q2CY21, we expect the damage to be significantly less than during the first wave and less than currently feared,” said Sonal Verma, chief economist at Nomura Securities. “Already, states are taking the first steps towards relaxing lockdowns, which suggests the peak hit to growth is behind us (in May), with June to be better in sequential terms.”
Delhi has already started ‘unlocking’ and has allowed construction work to begin. Restriction on movement has also been eased. Uttar Pradesh and Bihar also announced some ease in curbs.
Verma said beyond Q2FY22, she expects a mix of the ‘vaccine pivot’ point, strong global growth and the lagged impact of easy financial conditions to enable a faster pickup. Nomura expects GDP growth of 9.8 per cent YoY in calendar 2021 and 10.8 per cent in FY22.
Vital indicators are also picking up more actively now. The Nomura India Business Resumption Index (NIBRI), which is based on Google mobility indices, driving mobility from Apple, power demand and the labour force participation rate, appears to be bottoming out.
After falling for 11 consecutive weeks, NIBRI registered its first uptick for the week ending 30 May. Mobility indicators seem to have driven the uptick. If the NIBRI continues to exhibit a nadir over the coming weeks, it will support our view that the worst hit to activity is limited to May, and a sequential improvement will follow in June, Verma said.
There are three key questions, answers to which should govern the growth outlook from here on. First, how much damage to growth was done by the second wave; two, how long will the second wave drag last; and three, what will be the likely growth trajectory as India’s economy recovers from the second wave.
RBI policy change due
The rise in inflation and improvement in the economy will also likely end the holiday for the market as economists expect RBI policy normalisation from this year. However, in the near term, the central bank is likely to continue supporting the economy.
“We expect the RBI to maintain its accommodative stance this week, while announcing GSAP 2.0 to support government bonds. Beyond August, as vaccinations progress, we believe the RBI will assign a higher weighting to inflation. We continue to expect policy normalisation to begin later this year,” said Verma.
