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Second wave: UBS sees only minimal 20-30 bps hit on growth


Despite a massive spike in the pandemic caseload, Swiss brokerage UBS sees no repeat of a nationwide/statewide lockdown and expects only a minimal economic impact of the second wave that may lead to a 20-30 bps reduction in GDP.

UBS Securities India chief economist Tanvee Gupta-Jain on Tuesday retained the earlier house view of 11.5 per cent GDP growth this fiscal, saying the second wave has come as they were planning to upwardly revise growth forecast due to unexpected improvements in key economic indicators since the third quarter last fiscal.

We are retaining our 11.5 per cent GDP forecast for this fiscal, even though we admit that the pandemic scare has only increased. Though with Maharashtra, which contributes 15 per cent of national GDP, imposing near-lockdown type restrictions from Sunday, the impact on growth should be 20-30 bps only, Gupta-Jain told a media concall.

But given the massive improvement in key economic indicators since the third quarter, we were planning to upgrade our GDP forecast, which now stands cancelled, she added.

Explaining her optimism, she said this time around over 1 lakh daily cases are concentrated in just 26 districts across five states, contributing over 81 per cent of all infections, unlike the last time when the caseload was spread across 56 districts and in many more states.

This means that the authorities can contain the virus with localised lockdowns and restrictions like Maharashtra has just announced. And I don’t see even a statewide lockdown being clamped down even in Maharashtra, which carries more than 50 per cent of new infections, she said.

Also, the massive stimulus taking place in the US along with faster vaccination across the globe should help the global economy do better this year. Moreover, every 100 bps rise in global GDP increases the country’s GDP by 60 bps.

She also expects the speed of vaccination to improve from 0.4 million doses on January 16 when the vaccination began, as the country has gone on to become the second-largest in vaccination with 3.5 million doses a day, after China’s 4.8 million doses a day. The US is at third with 2.8 million daily doses.

But even at this rate, only 3 per cent of the population has been inoculated but if the vaccination continues at 3.6 million doses daily, then 36 per cent of the population can be inoculated by the end of December, she said.

On the monetary policy, she expects a status quo throughout this fiscal but a reverse repo tightening by 25-40 bps in the second half. But Gupta-Jain warned that a faster normalisation of the policy will upset everything the central bank has achieved in the pandemic hit 2020.

Also, she said the RBI cannot afford to have the trilemma of keeping the cost of funds for government and companies under check, maintaining the rupee at a particular level and also managing inflation.

The best RBI could and should do is to keep the cost of funds for government and corporates under check as it has to support and nurse the fledgeling recovery, but that does not mean RBI fights the market, she said.

Let markets determine the bond yields as well as the value of the rupee, which can fall to 74-75 to a dollar and there is no way the RBI can tame inflation before August, till then it will trend at 5.5 per cent, she added.

The RBI is doing the impossible trinity — of maintaining the cost of capital low for government and corporates and containing the fall of the rupee and also taming inflation. It cannot manage all three with same the level of focus and success, she said.

Advising to continue with the accommodative policy stance, she said of late the key economic indicators have plateaued and they are going to fall further in March. So, the RBI cannot but support the fledgeling recovery.

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