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  3. Second wave of COVID-19 infections poses increased risks for India’s fragile economic recovery: Fitch

Second wave of COVID-19 infections poses increased risks for India’s fragile economic recovery: Fitch

12 Apr 2021 Evaluate

Amid recent spike in coronavirus cases, Fitch Ratings has said the second wave of COVID-19 infections poses increased risks for India’s fragile economic recovery and its banks. The rating agency expects a moderately worse environment for the Indian banking sector in 2021, but headwinds would intensify if rising infections and follow-up measures to contain the virus further affect business and economic activity. India’s active COVID-19 infections have been increasing at a rapid pace with new infections exceeding 1 lakh a day in early April 2021, against 9,300 in mid-February. The agency said ‘the government’s more accommodative fiscal stance may also mitigate some short-term growth pressures. However, inoculating India’s large population in a fast and effective way will be important to avoid repeated disruptions’.

Fitch forecasts India’s GDP growth at 12.8 per cent for the current financial year ending March 2022 and this incorporates expectations of a slowdown in the April-June quarter due to the flare-up in new coronavirus cases. But the rising pace of infections poses renewed risks to the forecast. It said ‘over 80 per cent of the new infections are in six prominent states, which combined account for roughly 45 per cent of total banking sector loans. Any further disruption in economic activity in these states would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely’.

It also said the operating environment for banks will most likely remain challenging against this backdrop. This second wave could dent the sluggish recovery in consumer and corporate confidence, and further, suppress banks’ prospects for new business. There are also asset quality concerns since banks’ financial results are yet to fully factor in the first wave’s impact and the stringent 2020 lockdown due to the forbearances in place. Fitch noted that ‘MSMEs, however, benefited from state-guaranteed refinancing schemes that prevented stressed exposures from souring’.

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