BofA cuts its March quarter growth forecast to 4% on Covid-19 lockdowns

Wall Street brokerage Bank of America Securities has cut its March quarter growth forecast by 30 bps to 4 per cent, amid coronavirus pandemic-driven shutdowns and expects a cut in key benchmark rates on or before the April 3 monetary policy review.

The brokerage expects the pandemic-driven lockdowns to run through mid-April, crippling economic activities across the value-chain.

The agency also pegged down FY20 growth forecast to 4.7 per cent and FY21 to 5.1 per cent, respectively, assuming a 2.2 per cent global growth.

But if the global economy falls into a recession, the domestic economy is likely to fall further to 4.4 per cent in FY21, it warned.

The brokerage has also lowered its forecast for the June quarter (first quarter of 2020-21) by a sharper 80 bps to 4 per cent citing the pandemic impact on economic activities even as the government is taking measures to contain the spread of the deadly virus that has killed close to 8,000 people globally.

Back home, the country has so far been comparatively secure but the government and health authorities are expecting an implosion of the pandemic in the country over the next week.

The pandemic has already taken the lives of three people in the country and left hundreds in home and hospital quarantines.

We cut our real growth forecast by 30 bps to 4 per cent for the March quarter and by 80 bps to 4 per cent in the June quarter on rising Covid-19-related shutdowns, BofA Securities said in a note on Wednesday.

Its India economists Indranil Sen Gupta and Aastha Gudwani said their India Activity Indicator continues to point to a long bottom.

While growth has improved to 4.3 per cent in January from 3.5 per cent in December 2019, it is still below the 4.4 per cent printed in October-November.

Four of the seven components have improved in January from December, they said and warned that "although we had called that the worst is over after the November dataprints, the Covid-19-related shutdowns will likely pull down activity further".

Expecting an inter-MPC meeting rate cut of 25 bps before or at the scheduled April 3 review, they forecast two more repo cuts of 25 bps each in June and October, and said this is needed as high real lending rate is exerting a drag on growth.

The brokerage also blamed the rising real lending rates as the main villain delaying the fragile recovery.

On the rate cuts, they expect RBI to cut rates by 25 bps before/on April 3 as the US Fed has done so by a whopping 150 bps. The RBI will likely cut again in June with inflation set to fall to its 2-6 per cent mandate and the March quarter growth coming down to 4 per cent.

An October rate cut is likely as base effects and weak demand is expected to drag inflation down to 2.5 per cent in the first half of FY21, the note said.