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Covid-19 impact: Barclays cuts India's GDP target to 2.5%, fiscal deficit to 5% of GDP

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In the wake of Prime Minister Narendra Modi declaring a nationwide lockdown of 21 days in India, foreign brokerage Barclays has cut country's calendar year (CY) 2020 GDP forecast from earlier 4.5 per cent to 2.5 per cent now. It has also raised its fiscal deficit projections to 5 per cent of GDP from 3.5 per cent earlier.

"In our baseline assumption, we now factor in four full weeks of a complete shutdown, followed by another eight weeks of partial shutdowns across the country until the end of May (of which one week has passed already), as the COVID-19 related precautions will likely remain in the system. We estimate that the cumulative shutdown costs will be around $120 billion, or 4 per cent of GDP," says Barclays.

As a result of this 'anticipated material slowdown in activity', the foreign brokerage expects the RBI to undertake larger, and deeper rate cuts than previously factored in. "We now see the RBI moving close to 65 basis points at its April policy meeting, and believe an additional 100 basis points of cuts is needed to stabilise market sentiment between the June-August policy meetings (165 bps cumulatively to take rates to 3.5 per cent), along with outright bond purchases through OMOs, possible forbearance for bank loans and targeted liquidity windows for banks and NBFCs," it says.

Barclays expects the government to invoke the clause for managing natural calamities to find fiscal space. This may even entail the RBI directly placing funds with the government, but we wait for more clarity on this issue, it says.

The brokerage says there could be a slippage of 100 basis points due to weaker growth on its fiscal deficit projections of 5 per cent of the GDP. "This will push the consolidated fiscal deficit to -8.2 per cent of GDP, with risks clearly biased upwards."

Meanwhile, stock market on Wednesday rallied taking cues from the global markets, which advanced after US senate leaders reached a deal with the White House on $2 trillion economic stimulus to buttress the economy amid coronavirus-led challenges.

The benchmark Sensex spiked 2,116 points to hit a day's high of 28,790.19, while Nifty traded above its crucial 8,300 level.  The total number of active coronavirus cases in India stand at 512 so far, as per Ministry of Health & Family Welfare.

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