The Reserve Bank of India kept interest rates unchanged at its last meeting, but the economy is yet to get a gauge on likely impact from the China virus spread. Trade and tourism intake could be severely dented. Image Credit: Reuters

New Delhi (Bloomberg): A nascent recovery in India’s economy faces “unknown” risks from the coronavirus outbreak, according to a top government adviser.

“There are some green shoots, but I would be cautiously optimistic,” Krishnamurthy Subramanian, chief economic adviser said. “There are known unknowns and unknown unknowns. It’s hard to model unknown unknowns.”

The virus epidemic is seen curbing growth in China and the global economy, which will weigh on India’s outlook at a time when the government is forecasting a rebound. Asia’s third-largest economy will likely expand at 6-6.5 per cent in the year beginning April, an improvement from an estimated 5 per cent this year, Subramanian wrote in a report last month.

The virus “creates some uncertainty, especially in China,” Subramanian said, adding that it’s difficult to quantify the impact of the epidemic.


Recent purchasing managers surveys for manufacturing and services as well as industrial output data indicated some recovery in India after six straight quarters of decelerating growth. That optimism was tempered by a central bank survey that showed worsening consumer sentiment.

“It’s quite likely that we might have bottomed out,” Subramanian said. “I would wait for it to develop in a trend as sometimes these indicators can be volatile.”

The Reserve Bank of India last week left interest rates unchanged amid high inflation, while adopting unconventional policy tools to lower borrowing costs.

Trade and tourism drag

The central bank also flagged risks to tourist arrivals and global trade from the spread of coronavirus. It will cost the world economy more than $280 billion in the first three months of the year, putting an end to a 43-quarter global growth streak, according to Capital Economics Ltd.

“I would watch the coronavirus situation,” Subramanian said. “If you go by SARS episode that’s something you can draw lessons from. India wasn’t impacted that much. That’s what I would expect.”


Bond sales

India will sell a fresh set of bonds to overseas investors as it seeks to lift investment limits on certain securities. This is as part of efforts to get local notes listed on global bond indexes.

Removing investment limits on specific sovereign bonds will be the first “necessary step” for the inclusion. The nation’s administration aims to fulfill other conditions in the fiscal year beginning April 1, Krishnamurthy Subramanian said.

India may issue notes worth $5 billion with no caps on foreign investment.

Finance Minister Nirmala Sitharaman announced the plan to remove the limits in her budget speech as the government tries to push through a record borrowing plan of 7.8 trillion rupees ($109 billion) to fund a wider-than-estimated fiscal deficit. Getting added into global indexes could lure more foreign funds to supplement India’s waning local savings.

Sovereign bonds have rallied since the announcement of new bonds, with yields on benchmark 10-year notes dropping by 14 basis points to 6.46 per cent on Tuesday.

“There are trillions of dollars that passively track these indexes, and even a small amount of weightage that Indian bonds get in them will bring in an entire supply of capital,” said Subramanian.