The healthcare crisis triggered by the COVID pandemic has a ray of hope as FY21 draws to a close with optimism on vaccine rollout in the coming months.
Download ReportIndia Macrobook - FY22 Economic Outlook
FY21 will go down the annals of economic history in redefining economic shock as well as the policy response for mitigating unprecedented economic and financial risks. The year started off on a tone of utter despair, marked by the Great Global Lockdown that still continues to have both known and unknown spill overs. In response, fiscal policy turned countercyclical with a Keynesian imprint, while monetary policy extended the boundaries of conventional and unconventional tools of accommodation. Fortunately, the healthcare crisis triggered by the COVID pandemic has a ray of hope as FY21 draws to a close with optimism on vaccine rollout in the coming months.
This lays down the framework for crystal ball gazing at FY22, which we believe will be a function of 3Vs – Virus, Vaccine, and the V-shaped economic recovery.
- In our baseline scenario, we expect FY22 GDP to clock 11.5%, its first double digit expansion, led by complete ‘unlock’, pent-up demand, esp. for services, trickle down impact of past policy interventions, and finally global growth, which is also expected to post a V-shaped recovery.
- While this is comforting, few concerns would continue to prevail – (i) we expect retail inflation to remain somewhat sticky at 5.0%, marking its second consecutive upside deviation from the 4% target, and (ii) general government fiscal deficit would be slow to consolidate with the level of deficit projected at 9.5% of GDP, much higher than the pre pandemic average (over 3-years) of 6.3%.
- We expect the V-shaped economic recovery to lead to a U-shaped policy normalization. This is likely to be better manifested via monetary policy. Even though monetary policy would continue to remain accommodative for a major part of FY22, the RBI could normalize the overall setting by attenuating excess liquidity and restoring the width of the LAF corridor to 25 bps from 65 bps currently by gradually increasing Reverse Repo Rate to 3.75% from 3.35%. This would eventually be followed by a 25 bps hike in the Repo Rate, the first increase in 3.5-years.
- From a markets perspective, we expect the overhang of impossible trinity to start having a binding impact. While we continue to expect the central bank to juggle exchange rate and monetary policy management amidst a robust backdrop of global liquidity, the anticipated organic recovery in growth, especially from H2 FY22 onwards would get inflation into the limelight. As monetary policy starts the reversal of accommodation, which we believe would be backloaded from fiscal year perspective, the 10Y g-sec yield could potentially move towards 6.25% before the end of FY22. From currency perspective, even though the current account would revert to a moderate deficit (-0.9% of GDP) in FY22, capital account would continue to remain supportive – helping to generate USD 60 bn of BoP surplus. This along with the anticipation of a weaker USD trajectory, we expect INR to post moderate strength and move towards 71.50 levels over the next 4-quarters.