Bank of America sharply slashes India growth forecasts as global recession sets in

Within two days, brokerage Bank of America Securities has sharply cut the June quarter growth forecast by 90 bps to a low of 3.1 per cent and the full-year India GDP target by 100 bps to 4.1 per cent for FY2021, citing an almost certain global recession due to the COVID-19 pandemic.

On Wednesday, Bank of America Securities India had sharply projected down its June quarter growth by 80 bps to 4 per cent and the March quarter of the current fiscal by 30 bps to 4 per cent, citing the coronavirus-driven shutdowns.

It had also pegged full-year FY2021 growth at 5.1 per cent citing a likely fall in global growth to a low 2.2 per cent.

And Thursday's forecast is another 90 bps down from the previous projection for the June quarter growth and a full 100 bps for the full-year uptick from 5.1 per cent.

When it comes to the global growth, the same is downgraded by a whopping 180 bps to a paltry 0.40 per cent—all in a span of just two days.

Their house economists Indranil Sen Gupta and Aastha Gudwani expect the pandemic-driven lockdowns to run through end-April, crippling domestic economic activities across the value-chain—again a sterner warning from Wednesday's projection of the lockdowns ending mid-April.

“We cut our growth forecast by a sharp 90 bps to 3.1 per cent for the June quarter of FY21 and by 40 bps to 4.7 per cent for the full-year. We also see the Reserve Bank cutting 100 bps, up from 75 bps (as of yesterday), in 2020,” the house economists said, adding “we are now calling for a global recession.”

They count the GDP impact on the shutdowns at 50 bps per month. “We estimate a month's shutdown will cost about 50 bps of annual GDP” and expect the economy to come out only by FY2022 when GDP may print in at 6 per cent.

Explaining the rationale for the doom-scenario, they say a global recession is a reality due to the escalation in the Covid-19 pandemic and the general shutdown in India is seen extending further to the end of April and not mid-April.

Calling for a global recession, the brokerage has sharply cut the 2020 global growth forecast by 180 bps to 0.4 per cent—down from 2.2 per cent Wednesday. This will leave the US contracting 0.8 per cent and the global growth engine China plunging to a paltry 1.5 percent in 2020.

Penciling in a 100 bps rate cut through the course of 2020, they say this is needed as the real lending rates are still persisting at high levels for long now as falling demand is curtailing the pricing power of corporates further which in turn will longer the shutdown, speed up global recession.

“In response, we have added a fourth RBI policy rate cut by March 2021. We now see 25 bps cuts each on/before April 3, June, October and December,” they said.

They also warn that the down side risks for the country include elongation of the domestic shutdowns, weakening of corporate balance sheets at a time G-3 central banks are running out of ammunition.

They basis their argument to the India troubles, despite it being a domestically-driven economy, to the fact that contagion does still travel through disruptions in financial markets as it was seen in 2008.

On the impact of the high real rates and the falling pricing power, given the steeply falling consumer demand, they said high real lending rates are likely to persist with falling demand curtailing corporate pricing power.

Although nominal MCLR has come down by 54 bps so far, on RBI easing the real MCLR has jumped by 67 bps with wholesale price inflation falling 120 bps.

“Therefore we now expect the RBI to cut rates by 100 bps in FY21 with inflation set to drop to 2.5 percent in 2H of FY21. We see a 25 bps cut each on/before April 3, June, October and December,” say the report, which also sees the RBI infusing USD 38 billion of durable liquidity in FY21 atop the USD 76.4 billion so far.

They also expect a reasonably strong rupee as the reasonably high forex reserves should prevent a speculative attack on the unit.