Temporary Dip Expected

Assessing the latest RBI announcement JP Morgan says "the RBI observed that the economic hit from the second wave is likely to be less severe than a year ago, noting that "Aggregate demand conditions, particularly in contact-intensive services, are likely to see a temporary dip, depending on how the COVID situation unfolds. With restrictions and containment measures being localised and targeted, businesses and households are learning to adapt. Consequently, the dent to aggregate demand is expected to be moderate in comparison to a year ago." While we worry about the hysteresis from a second wave, given the series of rolling lockdowns across states, and coming as it does on the back of an incomplete recovery from the first wave, it's not surprising that the RBI did not make any growth revisions because its current projection for FY22 at 10.5% (J.P. Morgan 11%) is already very conservative. That said, today's announcements are in line with our belief that, given the ultra-accommodative stance of monetary policy, space for more easing at the aggregate level remains limited. Instead, the focus will need to move to a state-specific fiscal response, given the heterogeneous and asynchronous nature of the shock."

• Goldman Sachs downgraded growth forecasts earlier this week, now expected 20.5% contraction in Q2 from a 12.2% contraction previously, but still expect a rebound from Q3 onwards. Goldman adds "We continue to expect that back-end rates could move higher over the coming year given stretched valuations, adverse demand-supply fundamentals, high and sticky core inflation, surging commodity prices and higher global rates. However, as shown with the bond purchase program, the central bank remains committed to using its balance sheet to make this shift to higher equilibrium rates in a gradual and calibrated way, with perhaps a greater degree of comfort with higher yields in the second half of FY22 (October 2021-March 2022), if there is evidence that growth is recovering and broadening. We think it is likely that the RBI extends the recent INR1tn bond purchase program into Q3, most likely at the June meeting."