India Exits Recession Amid Risks from Resurgence in Virus Cases

(Bloomberg) -- India's economy returned to growth last quarter, ending a recession in time to battle new challenges posed by a surge in coronavirus infections.

Gross domestic product expanded 0.4% in the three months ended December after two consecutive quarters of declines, the Statistics Ministry said Friday. That was slower than the median forecast for a 0.6% expansion in a Bloomberg survey of 36 economists.

India became one of the few major economies to post growth in the last quarter of 2020, helped by a boost in government spending and the reopening of the economy, which is primarily driven by domestic consumption. Containing a fresh uptick in Covid-19 infections is key to sustaining the recovery, with policy makers' options limited by a global rout in debt markets that's making it costlier to borrow.

Underwriters had to step in again to rescue a scheduled sovereign auction earlier Friday, pushing the yield on benchmark 10-year debt up 33 basis points this month, its biggest jump since April 2018. While the government struggles to raise the money it needs to stimulate the economy, the central bank in a report indicated it prefers retaining its inflation target, pushing back on the administration's attempts to loosen the goal in favor of growth.

Stocks plunged too, mirroring a global sell-off in risk assets sparked by surging U.S yields. The rupee tumbled.

“This is a positive,” said Anubhuti Sahay, head of South Asia economic research at Standard Chartered Bank Plc. She expects the recovery to continue but “downside risk can emanate if recent rise in Covid cases in select states become more widespread or if the informal segment takes much longer to revive.”

The Indian state of Maharashtra, whose capital Mumbai accounts for 6% of the national economy, warned of lockdowns after the number of daily cases rose to almost 7,000 last week. India overall reported more than 16,000 new daily infections as of Friday, and is still home to the world's second-biggest outbreak.

Read: Massive Vaccine Drive Starts in India Despite Safety Doubts

A recovery in growth will lower the pressure on the central bank, which did most of the heavy lifting in the past year through 115 basis points of interest-rate cuts and ensuring liquidity in the financial system. The government has since announced fiscal steps to support the economy, including a near-record borrowing in its latest budget this month.

“The infection caseload in some parts of the country is, however, again creeping up,” Reserve Bank of India Governor Shaktikanta Das said Thursday. “We need to stay vigilant and steadfast, and on our toes.”

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