NOMURA CUTS GDP FORECAST TO 11.5% FOR 2021

The resurgence of Covid cases in India amid the possibility of higher inflation rates has led Nomura to cut the 2021 gross domestic product (GDP) forecast for India to 11.5 per cent from the earlier

12.4 per cent.

Besides India, it has cut the 2021 GDP forecast for the Philippines to 5.4 per cent from 8.8 per cent.

Re-pricing emerging market (EM) risk premium, Nomura said, could expose vulnerabilities in Indonesia, India, and The Philippines. The challenge for EM Asia, according to it, is that these countries may face tighter financial conditions even when the outlook for growth is still weak. This, it believes, will require central banks to choose between supporting growth (tolerating higher inflation) or responding via rate hikes (at the cost of growth).

“In our judgment, all three will respond (via rate hikes), but to varying degrees. A more forceful response in the Philippines and Indonesia could undermine growth, whereas a less aggressive response in India could fan inflation,” wrote analysts at Nomura in an April 9 report led by Sonal Varma, managing director and chief India economist at the research and broking house.

Counted among the “Fragile Five” in 2013 in the backdrop of the “taper tantrum”, India, Nomura said, has built a strong foreign currency war chest -- up from 6.5 month import cover in Q1 FY13 to over 17 months now. The current account balance, too, is also in a much stronger position. Despite this, the pandemic has dented the fiscal position across countries and India, Nomura believes, is at more risk of fiscal dominance.

“In both Indonesia and India, insufficient appetite for government bonds, relative to the large supply, has resulted in more active central bank bond buying, as they try to offset crowding out risks. Even in India and Indonesia, where we are relatively optimistic on vaccination, the domestic banking sector is weak and risk-averse, while the full impact of the pandemic on their asset quality is unclear. With a recovery not yet secured, their domestic economies have much less capacity to handle a major shock,” Nomura said. Meanwhile, those at Jefferies, too, have cautioned against the possible rise in inflation rates in the backdrop of key commodities firming up. In his March 2021 note to investors, GREED & fear, Christopher Wood, global head of equity strategy at Jefferies, cautioned that investors should be prepared for the biggest inflation scare since the 1980s.