Goldman ups India GDP forecast on vaccine hopes, now sees 10.8% contraction

Foreign brokerage Goldman Sachs on Tuesday upgraded its India GDP forecast to a contraction of 10.3 per cent in FY21, as against its earlier estimate of a negative growth of 14.8 per cent.

The US-based firm said developments on the vaccine front -- where two candidates have posted satisfactory progress -- will be very helpful in the recovery.

The Reserve Bank expects India's GDP to contract by 9.5 per cent on real basis in the ongoing fiscal because of the impact suffered by the economy during the COVID-19 pandemic.

The GDP will stage an impressive recovery in FY22, with a growth of 13 per cent on the low base and benefits of the vaccine, Goldman Sachs said in a report.

"There is still a high degree of uncertainty around the outlook - and growth could significantly overshoot or undershoot these forecasts - depending on the course taken by the virus and vaccine-related developments in the coming year," it said.

It expects a normalisation in the containment policies and mobility restrictions only in mid-2022, once a vaccine is deployed.

A meaningful rebound in economic activity will happen from 2021 itself, it said, adding that consumer-facing services sectors will stage a faster recovery.

However, the pace of the rebound will be restrained by some "economic scarring", and a number of factors like a weak labour market, the hit to private sector incomes and balance sheets, tighter credit supply conditions and a limited impetus from fiscal policy, it said.

Headline inflation is likely to decline towards the mid-point of the RBI's target band of 2-6 per cent by mid-2021 as food prices fall on easing supply restrictions, a benign monsoon and favourable base effects, it said.

Core inflation could also moderate given low manufacturing capacity utilisation and appreciation in the rupee.

This will result in the RBI's Monetary Policy Committee (MPC) cutting rates by 0.35 per cent next year, it said, adding that the panel with three new members has a dovish tilt.

The brokerage further said it will be overweight on Indian equities on the macro recovery and relatively higher sensitivity of Indian stocks to positive vaccine outcomes and added that appreciation pressures on the rupee will persist.