6% FY21 GDP contraction
The Covid-19 shock is expected to contract gross domestic product (GDP) by 20% in the June quarter and 6% in FY21 in BoFA’s base case. This assumes that unlock measures will extend to mid-November with the restart taking six weeks to December.
CPI inflation on weak fundamentals
Consumer price index (CPI) inflation should slip to 2.5% in H2FY21 from 6.4% estimated by BofA
in July, as supply side disruptions (evident in a growing wedge between CPI and WPI food prices) and methodological issues are ironed out. Apart from favourable base effects ahead, fundamental drivers remain weak: GDP contraction, improved sowing, and low “imported” inflation.
High real lending rates hurt growth
High real lending rates might hurt growth beyond the Covid-19 shock. While nominal MCLR (marginal cost of funds based lending rate) has reduced by 105 basis points (bps) since March 2019, real MCLR is still up by 44 bps
‘Busy’ industrial season begins in October
Time is running out for RBI rate cuts with the “busy” industrial season beginning in October. As loan demand picks up seasonally, transmission of RBI easing would become more difficult
Rising money supply growth
Rising money supply growth, at 12.4% above our 9.1% forecast, constrains the RBI from trying to contain yields through quantitative easing ($105 billion Open Market Operations) as freely as in the past. It is for this reason BoFA
expects the RBI to extend HTM (held to maturity) to its estimated additional borrowing of 4% of GDP/5.3% of NDTL (net demand and time liabilities) as well as buy foreign exchange ($17.2 billion) forward.
Adequate forex reserves
Adequate foreign exchange reserves should provide room for the RBI to cut rates and support recovery. BoFA estimates that the RBI can sell $50 billion to defend the Indian currency in case of a speculative attack.