Resurgence of COVID infections is adding downside risks to growth: Kotak Mahindra Bank’s Upasna Bhardwaj

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank and Neeraj Gambhir, President of Head Treasury & Markets at Axis Bank spoke to CNBC-TV18 to discuss the State of the Economy after the bunch of numbers that came for FY21- high tax collections, poor core sector performance in February, as expected borrowing program and continuation of the inflation-targeting mandate.

On core sector data Bhardwaj said, “Firstly, we need to keep into account that the IIP data overall of which about 40 percent is coming from the core data that tends to be volatile but nonetheless this reading is much worse than what we had anticipated. It clearly points to the fact that the recovery is going to be patchy even going ahead.”

“This COVID resurgence only adds more downside risk I would say to overall growth so clearly it does paint a grim picture,” she added.

On tax collection, she said, “For now at least because tax collections are a function of how the economic activity otherwise has been through this month we have seen most of the high-frequency data holding up at least and hence the tax collections are catching up quite a bit. So we do expect that fiscal deficit for the year gone by - FY21 to be far better than what the government had given in the revised estimates and we are looking at a number closer to 7.7 percent.”

On policy, Gambhir said, “At this point in time central banks across the world are looking through this phase of inflation and saying that they need to continue to be supportive so I don’t think that stance is likely to change in India as well. So we are expecting very much status quo policy in the first week of April.”

On 10-Year bond yield, he said, “The total estimate of liquidity should be anywhere close to Rs 12-13 trillion and that is a very large amount of liquidity which is sitting in the system so I don’t see concern around liquidity front. The issue is that how well the market is able to absorb this supply, particularly in the first quarter. There will be certainly some amount of pressure but that pressure can be offset by the Reserves Bank’s own open market operation strategy, how frequently they do it, what is the size they used to do it so assuming we balance all of these things out I think that we will probably be somewhere around 6.25-6.30 level in the 10-year bond yield for the rest of the quarter.”