Expect 50 bps rate cut by October: Bank of America

India's economy may contract by 3 to 5 per cent in FY'21, which may trigger a 50 to 150 bps points reduction in benchmark repo rate by the central bank during the year, according to a report by Bank of America Securities. In addition high real lending rate is also a concern.

Assuming that the economy will open up fully by August the forecast is that of a 3 per cent contraction. This may go up to 5 per cent if the crisis prolongs. "It is difficult to forecast annual growth in such uncertain times" said Indranil Sengupta, chief India economist at Bank of America Merrill Lynch. "The April-May lockdown had a 150 bps a month. We are factoring in 100 bps impact a month in the partial lockdown. The extent of impact would depend on how much the crisis prolongs." A basis point is 0.01 percentage point.

Economists' forecasts for India's FY'21 growth have varied between 3 per cent to over 7 per cent following the contraction in economic activity due to the COVID-19 induced nation-wide lockdown. The quantum of rate reduction would depend on the extent of contraction in the economy, Gupta said. Another trigger for the rate cut would be high real lending rates, the Bank of America report said. While nominal lending rate gas dipped 94 bps since March'19, real lending rates has risen by 94 bps as core WPI inflation has increased by 200 bps during the period. "Effectively, this is still monetary tightening" Gupta said.


From the fiscal side, the rating agencies are not concerned about the high fiscal deficit according to Gupta as most economies have come out with a stimulus package that would impact fiscal deficit. Their real concern is that the government will not be able to recapitalise the public sector banks from the budget. But India has two non-fiscal levers which can be used to recapitalise banks. One is through direct issue of bonds and the other is use of a small portion of RBI's $139 billion revaluation reserves.