The Indian economy has seen its fair share of tough times, battling its way out of one of the deadliest Covid second waves. However, there seems to be some respite coming in for the Indian economy as the Nomura India Business Resumption Index (NIBRI) has finally risen above 100 for first time since the second wave of Covid. It is now higher than both February 2020 and February 2021 levels. The lowest levels were in March-April 2020 at around 46.5 and by February-end it was back at 99.3. In mid-May of 2021, it was at 60.4 and in August first week, it was back at 99.6. It has now crossed above 100 to 101.2.
The economy took 10 months to crawl back to the 100 level after the first Covid wave and less than three months after the second Covid wave.
To discuss in detail, CNBC-TV18’s Latha Venkatesh spoke with the author of both the index and the report, Aurodeep Nandi, India economist, vice president, Nomura Financial Advisory & Securities.
When asked if he would now increase the GDP forecast for the current year, he said, “We are already out of consensus on our GDP projection. We are at 10.4 percent for FY22 and our Q2, that is April to June projection, is around 29.4 percent year-on-year (YoY), which boils down to a sequential 4.3 percent quarter-on-quarter (QoQ) seasonally adjusted, which is higher than what the RBI
or possibly even the consensus is saying.”
Nandi further added, “What the NIBRI has shown is, it corroborates with the hunch we had, at the start of this fiscal, that there will be a second wave but the economic impact is not going to be as high as the humanitarian impact and it is in line with international experience. Countries that have gone through a second and a third wave have seen lesser and lesser sensitivity of GDP growth alongside fallen mobility. That is what we have also seen, essentially, a rapid recovery back and we are likely to see this momentum somewhat continue. We have got the vaccines coming in, we have got a number of tailwinds coming from here, from a GDP projection perspective, as of now, we are safe.”
When asked about his views on the reverse repo rate hike and also if the GDP Q2 number is closer to their projection of 29 percent vis-à-vis that of RBI’s at 21 percent and if he expects a change in the Central Bank’s stance given that consensus expectation is no reverse repo hike in 2021, Nandi said, “Yes, we are expecting it. So again, we are out of consensus there, and that sort of syncs with our growth and inflation projections. So, the point is that the trade-off between growth and inflation gets starker for the RBI, going forward.”
He further mentioned, “There is growth risk because we are possibly at the cliff edge of the third wave. We do not know what's going to happen there. There is a genuine concern that some parts of goods indicators aren't doing all that well. But the key question is, what can the RBI do at this stage where inflation expectations are at multi-year highs, where you have higher input prices transmitting to higher retail prices, where you are seeing a lot of core inflationary pressures that are inherent in the system, and so if we have unseasonal rains or something at the end of the year, you could have the food inflation that has been going down suddenly start picking up.
As a result of this, we believe our baseline case is that the RBI does a reverse repo rate hike by the end of this calendar year. And in fact, we have 75 basis points of repo and reverse repo rate hikes next year. In our view of the world, and I know this is different from the guidance which the RBI has given so far, we believe that policy normalisation is essentially a writing on the wall.”
With regard to GDP
growth, he said, “This year has seen a lot of bass effect kick in. After 10.4 percent, we do expect it to stabilise between 7 to 8 percent in 2022. So, there should be some recovery here. One, global growth is extremely strong. This is one of the biggest global growth years that we've seen in a while. And the kind of fiscal stimulus that we're seeing in the US, in other countries are likely to spill over to next year. And India's growth cycle is quite synced with the global one. Secondly, we've got easy financial conditions, so the interest-sensitive sectors of the economy should benefit from it. Third, we've got the vaccine pivot. It's still not yet come in August. But if we start doing 7 million or above doses per day, that's going to start creating an ultimate unlock of the economy.”
For the entire discussion, watch the video