RBI Nowcasting Model Pegs Q2 GDP Fall At 8.6% 
A man wheels a bicycle past the Reliance Mall in the Borivali suburb of Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

RBI Nowcasting Model Pegs Q2 GDP Fall At 8.6% 

The Indian economy likely slipped into a technical recession in the second quarter of the current financial year as the GDP contracted for a second straight quarter, showed an internal nowcasting model of the Reserve Bank of India. The extent of contraction in July-September was much lower than in the April-June period, the data suggests.

India’s GDP is estimated to contract by 8.6% in July-September after a contraction of 23.9% in the April-June quarter, according to an Economic Activity Index constructed by the RBI, using 27 high-frequency indicators. These ranged from IIP and auto sales to the Job Speak Index, U.S. industrial production and U.S. payrolls.

The index and the forecasts were released in the RBI’s bulletin for November 2020.

After the index plunged 6.4% in April amid the lockdown, it gradually recovered to contract by 2.1% in September, said the analysis, adding that though the rebound was sharper in May and June after the economy reopened, it turned somewhat slower in July, August and September.

It was also observed that the recovery has been more rapid for industry and much slower for services despite being synchronous and of equal magnitude at the start of the lockdown.

“Thus, the analysis suggests a two-speed recovery with contact-intensive service sectors (e.g., retail trade, transport, hotels and restaurants, and recreation) showing sluggish recovery in the face of continuing health risks,” stated the bulletin. The analysis also indicated that in contrast to the domestic industry and service indices, the global index declined to a lesser extent and seems to have recovered better.

Also read: Precautionary Household Financial Savings Soared In Q1, Shows RBI Data 

Also read: October Surprise: High Frequency Indicators Point To Quicker Rebound

The October Shift

The central bank also noted that incoming data for the month of October 2020 has brightened prospects and stirred up consumer and business confidence.

With the momentum of September having been sustained, there is optimism that the revival of economic activity is stronger than the mere satiation of pent-up demand released by unlocks and the rebuilding of inventories, said the RBI, adding that if the trend is sustained, then GDP could revert to growth by the October-December quarter itself.

If this upturn is sustained in the ensuing two months, there is a strong likelihood that the Indian economy will break out of contraction of the six months gone by and return to positive growth in the October-December 2020 quarter.
Reserve Bank of India Bulletin, November 2020

However, the central bank cautioned that downside risks to the economy remain as inflation shows no signs of easing.

“There is a grave risk of generalisation of price pressures, unanchoring of inflation expectations feeding into a loss of credibility in policy interventions,” it said. The RBI added that the second wave of Covid infections in the global economy also posed a risk to India’s economic recovery, along with intensifying stress for households and corporations that could well spill into the financial sector.

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