India’s second COVID wave has intensified within a short period, leading to rising containment measures in several states. This poses downside risks to our real GDP projection of 12.4% YoY in FY22 by 100-250 basis points, but given the highly dynamic situation, we will wait for more data to quantify the extent of the required revision. We expect the second COVID wave to weigh on sequential economic recovery in Q1 FY22. However, economic recovery should rebound quickly in the following quarters supported by a rapid vaccination drive, adaptability to a ‘new normal’, improved corporate and household balance sheets, fiscal spending focused on investment, and better external demand. Experience of major economies also suggests that second/third waves do not necessarily derail the economic recovery. Despite relatively less policy space than last year, policymakers should also have the flexibility to support within the current framework.
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