Ratings agency Nomura has said the second Covid-19 wave is likely to get worse in terms of the number of infections, and as such, more restrictions are likely, which will hurt the sequential momentum of growth in Q2 CY21.
It agreed with the RBI's assessment in the MPC policy statement that less stringent lockdowns, an adaptation to the new normal, ongoing vaccinations, stronger global growth and lagged effects of easy financial conditions are likely to support the cyclical growth recovery.
Nomura said risks to underlying inflation are rising, and the moderation in recent inflation data is largely due to the volatile vegetable component. "The broad-based rise in commodity prices and higher freight costs have squeezed manufacturers' profit margins and resulted in some of these costs being passed to consumers," said Nomura.
Nomura said the Reserve Bank of India's (RBI) latest monetary policy stance is "less dovish than meets the eye" as it maintained its GDP projection despite the 2nd wave, projected CPI inflation higher and shifted its view on forwarding guidance.
It said the RBI chose to shift from a "time-based guidance to a state-based one", given the uncertainties around the impact of the pandemic on growth and inflation, rising input-cost pressures and growing external risks (higher US bond yields).
The Shaktikanta Das-led Monetary Policy Committee (MPC) on Wednesday decided to keep key lending rates unchanged and maintained an 'accommodative' stance. Das said it'll stick to an accommodative stance "as long as necessary to sustain growth on a durable basis".
Nomura says the RBI has given itself policy legroom to change course, if necessary. Assessing the RBI's announcements, Nomura said it is trying to meet multiple objectives: to support growth with ample liquidity, manage long-term yields via the G-SAP programme while aiming to ward off any build-up of inflationary pressures by doing more VRRR. "Managing these conflicting objectives will involve trade-offs," Nomura said.