Nomura ups India's 2022 GDP forecast to 7.7%; sees inflation at 5.3%

Despite the second wave of Covid infections that brought the economic activity in most cities to a standstill in the past few months, Nomura has raised India’s gross domestic product (GDP) forecast for 2022 by 0.7 percentage points (pp) to 7.7 per cent. That apart, the research and brokerage house has rejigged the forecasts for consumer price inflation (CPI) and current account deficit.

“We raise our 2021 and 2022 current account (CA) deficit forecasts to 1.5 per cent and 1.3 per cent of GDP, respectively (from 1.1 per cent and 0.8 per cent), and CPI inflation to 5 per cent and 5.3 per cent (from 4.9 per cent in both years). We also pencil-in an additional 25bp repo rate hike in Q3 2022,” wrote Sonal Varma, managing director and chief India economist at Nomura, in a recent co-authored note with Aurodeep Nandi.

The first flush of growth indicators for May, according to Nomura, suggest a significant hit to consumption and services, with the manufacturing and export sectors being more resilient. The overall impact, Varma and Nandi said, is turning out to be less than during the first wave. Downside risks, however, include a third wave, a slower pace of vaccination, capital outflows and higher commodity prices. Upside risks include a faster pace of vaccination.

“The bottoming of ultra-high frequency indicators at end-May and the measured reopening across states suggest the worst might be over, although growth is likely to rise only gradually in June,” Nomura said.

GDP, according to their estimates, is likely to contract by 4.3 per cent quarter-on-quarter (q-o-q) in Q2, much smaller than during the first wave (-24.7 per cent). Beyond Q2, tailwinds such as strong global growth, an increased pace of vaccination, easy financial conditions and front-loaded fiscal activism should help GDP growth reach 9.8 per cent in 2021 and 7.7 per cent in 2022, Nomura said, and expects 50 per cent of the Indian population to be inoculated by end-2021.

This, however, is in stark contrast to those at Jefferies, who expect just 32 per cent of Indian citizens to be fully vaccinated by the end of the year.

“Leading vaccinators US / UK /Israel are showing signs of plateauing at a first dose rate of 52 per cent/ 60 per cent /60 per cent of population. At these rates, the US / UK / Israel have seen a marked decrease in daily deaths from respective peaks in late Jan-2021. India, with its diverse population and poor infrastructure outside cities, will find it challenging to reach these vaccinated numbers quickly,” wrote Abhishek Sharma, an analyst at Jefferies in a recent note.

Meanwhile, Nomura sees policy normalisation to begin in Q4-2021, with liquidity normalisation and a 40 basis point (bp) hike in the reverse repo rate. "We now expect a cumulative 75bp of repo rate hikes in 2022, in light of higher inflationary pressures," they said.