Sequential pickup in H2
Nomura is lowering is 2020 GDP growth forecast in India to -0.5% y-o-y from 4.5%, citing various impacts of coronavirus crisis including further financial stress in the banking sector.
“We now expect GDP growth to slide from 4.7% y-o-y in Q4 2019 to 3.1% in Q1 and plunge to -6.1% in Q2, when both domestic and external demand will weaken,” wrote the Japanese origin banking group in 30 Mar 2020 report.
Nomura is building in a sequential pickup in H2, but the pace of recovery is likely to be much weaker given some lasting damage to potential output.
On policy, it expects continued coordinated monetary and fiscal policy easing. The government has announced a 0.8% of GDP economic package for vulnerable citizens and more is expected to eventually follow with the Central Government’s fiscal deficit likely to widen to ~5% of GDP versus 3.5% targeted in FY21.
The Reserve Bank of India (RBI) announced a 75bp cut in the repo rate and a 90bp cut in the reverse repo rate (widening the corridor to disincentivise banks to use the reverse repo facility) on 27 Mar 2020.
“We expect 75bp more of repo rate cuts and more unconventional tools
likely to be deployed as the growth situation worsens.
Even if global growth starts to recover by late Q2, the domestic-led drag from social distancing is likely to remain predominant. As a result, Nomura believes the ‘good case’ will be only partially better than its baseline.
Good case: Under this scenario, it expects GDP growth to slow from 3.1% y-o-y in Q1 to -5.1% in Q2 and average at 2.3% in H2. This reflects a relatively shorter period of lockdown (21 days from 25 Mar 2020) and an eventual stabilisation of the number of cases.
GDP growth will likely rise 0.6% y-o-y in 2020.
However, the output gap will remain negative and both fiscal and monetary response should be similar to Nomura’s baseline.
Bad case: In this scenario, Nomura projects a full-blown credit crisis for India as corporates find it difficult to stay afloat and banks struggle with the balance sheet fallout.
Rising unemployment, loss of income and disenchantment against the draconian measures may even lead to social unrest.
“In this scenario, we expect GDP growth in Q2 to fall to -10.3% y-o-y and -1.5% in H2. We expect this to result in the fiscal deficit slipping to 5.5-6.0% of GDP versus the 3.5% target for FY21,” said Nomura.
The RBI will likely deliver ~100bp of policy easing, even though inflation may face some upside risk from food and medical good shortages
due to prolonged shutdowns.
“We expect a material expansion of the scope of the RBI’s asset purchase programme, including large scale purchase of governments bonds,” said Nomura in the COVID-19 impact on World Economies and Markets.
“How our forecasts have evolved reflects how quickly the global economy has worsened,” said Nomura.
It explained the global economic performance as such:
On 17 February, we lowered our global GDP growth forecast for 2020 from 3.3% to 3.1%;
then after 17 days on 5 March we cut it further to 2.7%;
8 days later on 13 March we cut it to 2.3%, and now after 14 more days we have slashed it to -4.0%. fiinews.com
