An ongoing reduction in India’s new daily COVID cases is allowing the economy to slowly return to normal. From a peak of over 400,000 in early May, the daily caseload has eased back to around 120,000, allowing several areas including New Delhi as well as Maharashtra state to begin lifting restrictions. Mobility is improving and continued normalisation should contain the economic disruption to the April-June quarter (Chart 1).
Vaccine rollout remains modest at around just 3.3mn per day, versus 19.4mn in China, leaving India below the world average on a per capita basis. But this is set to improve. Production at India’s Serum Institute is to jump by 40% this month, while Bharat Biotech (which produces the Covaxin vaccine) is also expected to increase production. Faster vaccine rollout should allow the recovery to gain traction, with pent-up demand boosting consumer spending and production disruptions ending.
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Summary
- Mobility restrictions in India are beginning to ease with daily COVID cases down sharply from earlier highs.
- Vaccine rollout remains modest but should start to improve later this month.
- With rising oil prices and upside risks to inflation from recent supply disruptions we expect the RBI to use rupee appreciation to curb price pressures.
Rising Vaccine Production and Improved Mobility Boosts Recovery Optimism
An ongoing reduction in India’s new daily COVID cases is allowing the economy to slowly return to normal. From a peak of over 400,000 in early May, the daily caseload has eased back to around 120,000, allowing several areas including New Delhi as well as Maharashtra state to begin lifting restrictions. Mobility is improving and continued normalisation should contain the economic disruption to the April-June quarter (Chart 1).
Vaccine rollout remains modest at around just 3.3mn per day, versus 19.4mn in China, leaving India below the world average on a per capita basis. But this is set to improve. Production at India’s Serum Institute is to jump by 40% this month, while Bharat Biotech (which produces the Covaxin vaccine) is also expected to increase production. Faster vaccine rollout should allow the recovery to gain traction, with pent-up demand boosting consumer spending and production disruptions ending.
Real economy data trickling out reflect the earlier COVID spike and offer little information on India’s outlook. May PMI dropped five points to remain just in expansionary territory at 50.8, with the sales and output components showing the slowest expansion since July. And consumer confidence fell to a record low in May. Given the reported production suspensions and service sector closures, a very soft quarter is already incorporated into forecasts. Bloomberg consensus now sees GDP growth at 9.5% for FY2022, down from 10.5% previously, with some forecasters projecting around just 7%. GDP growth for the January-March quarter was nevertheless reported at a better-than-expected 1.6% YoY, taking growth for FY21 to -7.3%. Fairly strong momentum entering the COVID crisis leaves a strong base for the economy to recover. Updated RBI growth forecasts are now also for 9.5% in FY2021-22 from 10.5% previously.
RBI Retain Pro Growth Stance With the Rupee, Not Rates, Curbing Inflation
As expected, the RBI remained pro-growth at Friday’s policy meeting. Recent disinflation leaves the RBI in a reasonably comfortable position for now. But inflation is set to move higher again in coming months given supply disruptions from the recent mobility restrictions and ongoing gains in fuel prices. The RBI raised its inflation projection to 5.1% for the current fiscal year and while still within target it leaves less room to manoeuvre. RBI rhetoric will likely start to turn more hawkish but with the possibility of a rate hike some way off for India, we expect a tightening of monetary conditions to come via a stronger rupee.