India's GDP to contract 1% in December quarter, says BofA

Against the majority view of a rebound in the growth numbers for the December quarter, the house economists at the Wall Street brokerage Bank of America Securities on Tuesday pencilled in a 1 per cent contraction in India's GDP for the third quarter.

On an average, economists at almost all the rating agencies and brokerages have forecast 0.4-0.7 per cent positive growth for the economy that has contracted a record high 23.9 per cent in the first quarter and 7.5 per cent in the second quarter of the current fiscal.

The contraction in the first half of the current financial year ending March 31, 2021 is 15.7 per cent.

Expecting a rebound in the second half, Bank of America Securities India has pencilled in a contraction of only 7-7.7 per cent for the year, still making it the worst on record and the third since Independence.

BofA's negative 1 per cent GDP growth assessment comes despite its activity indicator recording a 1.7 per cent growth in December after declining for nine months on the trot.

Also read: GDP to be in growth territory in December quarter, says report

In a report, BofA Securities India said it sees GDP contracting by 1 per cent in the December quarter,

The BofA India activity indicator rose by 1.7 per cent in December after reporting (-) 0.6 per cent and (-) 0.8 per cent in November and October, respectively. The December quarter print was at 0.1 per cent growth but recovering from (-) 4.5 per cent in the September quarter and (-) 20.7 per cent in the June quarter.

"This supports our call of GVA contractions of 1 per cent in the December quarter and (-) 6.7 per cent in FY21," it said.

As per the report, credit growth slipped to 5.6 per cent in late January from 6.2 per cent on January 1. This shows that the economy remains weak and the only relief is that the real lending rates are coming off with the real MCLR falling by 230 basis points since March 2019 on sustained RBI easing, it added.

The economy is limping back from the pandemic shock. The good news is that the India activity indicator has finally risen by 1.7 per cent in December after declining for nine months continuously, it said.

Looking ahead, the brokerage expects the RBI to conduct OMOs (Open Market Operations) and LTROs (Long Term Repo Operations) worth USD 39 billion in FY22 to fund the high fiscal deficit at reasonable yields to nurse the recovery.

On balance, the report said that it expects the RBI to remain on hold throughout FY22 and hike rates by 100 basis points in FY23.