Vaccine rollout will set the pace of economic recovery

In its report, BofA Securities  has said that India’s economic growth is expected to grow at 9 per cent for FY22, if the vaccine is rolled out in the first half of CY21 and 5.5 per cent for FY23.

The pace of economic recovery and strength thereof will depend on the degree of the Covid-19 vaccine rollout, said BofA. The brokerage firm stated that if the vaccine is rolled out in the second half of CY21, the GDP for FY22 will grow at 6 per cent.

The foreign brokerage firm expects that the Reserve Bank of India to cut interest rates by another 50 basis points (bps) in calendar year 2021. This, according to the brokerage, would be followed by a 100 basis points hike in interest rates in fiscal year 2023.

“We are looking at a 50 basis point cut in the repo rate for 2021 and we are looking at a 100 basis point hike in interest rate in FY23,” said Indranil Sen Gupta, India economist, BofA Securities.

The brokerage also stated that it expects inflation to come down, which would allow the RBI to maintain an accommodative stance going forward. However, given that liquidity is rising, BofA Securities believes that the RBI would have to resort to held to maturity (HTM) limit hikes in order to fund the fiscal deficit which would remain at 5 per cent of the GDP.

It also expects demand side measures to be taken by the government. “One innovation we expect from the government is to issue infrastructure bonds to fund infrastructure investment,” said Sen Gupta. He also added that the RBI will continue to build foreign exchange reserves by buying $45 billion in FY 22. The economic recovery would be driven by consumption, according to the brokerage.

BofA is of the view that the biggest uncertainties for CY21 are the vaccine roll out which is expected to drive growth, changing policies in the United States of America and whether the liquidity in the capital markets would drive the fuel oil prices up.