Activity returning to pre-virus levels

Indian GDP data due to be released on Friday are likely to show only a small contraction in annual growth in Q4 2020, and high-frequency indicators point to a relatively strong start to 2021. Indeed, our in-house mobility tracker suggests that activity has returned to pre-pandemic levels. The outlook has improved too as fiscal policy has been loosened significantly. That all being said, there are still reasons for caution. While new COVID-19 cases remain low, the recent flare up in Maharashtra highlights the risk of targeted lockdowns, at least in the near term. Meanwhile, the ailing banking sector looks set to take a further hit this year as more loans turn sour, which we think will prevent the economy from returning to its pre-virus trend any time soon. According to RBI Governor Shaktikanta Das, this is an important barometer in determining the health of the economy. As such, we think markets are too hasty in pricing in rate hikes within the next 12-18 months and think rates will remain on hold for the foreseeable future.