Soumya Kanti Ghosh, Group Chief Economic Advisor at State Bank of India and Kaushik Das, India Chief Economist at Deutsche Bank discuss the ballpark hit on gross domestic product (GDP) growth because of COVID-19 and how different it is from the 2008 crisis. They also spoke about what could be the policy responses in an interview with CNBC-TV18.

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According to Ghosh, the hit on GDP due to COVID-19 would spread into Q1FY21. “The hit on the GDP is an ongoing process and it would spread over this fiscal year -- in March and mostly Q1 FY21 assuming that the crisis abates by the end of June or July,” he said.

“The GDP number for the CSO which was estimated at about 4.7 percent is likely to be closer to around 4 percent as of now. But the impact of that is still uncertain because it is an evolving process and the larger impact could be felt in the next quarter,” he added.

According to Das too the damage is expected to spread into next quarter. “We have a forecast of 3.7 percent real GDP growth for January-March. I think the bigger impact would be in April-June because this lockdown that we have till March 31 could be possibly spilling over to April as well. If that happens, there would be bigger impact in April, May, and June," he said, adding that there will be a fear psychosis in people’s mind. Even if the lockdown is taken out, people will be a little scared to visit different places. So, the damage would be spread over not just this quarter, but over next quarter as well.

"Depending on how COVID-19 evolves, we will get to know whether July-September also is a washout or not. So, at this moment we think 3.7 and 3.5 still has downside risk,” said Das.

However, Das added that he has a full year GDP estimate of 4.5 percent. “We have a full year estimate GDP growth for FY21 at 4.5 percent. But can that fall to 4 percent or lower? It can easily happen if the pandemic worsens from here on,” he said.

Das is expecting a 100 basis points rate cut over the next few months. “I think RBI would be cutting rates. So, we have a 100 basis points rate cut over the next few months with possibly 50-65 basis points coming in as early as April 3, or even before that,” he said.

“However, rate cuts by themselves will not solve the problem as we have seen in case of US. I think open market operations (OMOs) would have to be done aggressively over FY21. RBI will be the one who will be buying the government bonds and I do not rule out a possibility of RBI buying G-Sec from the primary market as well because you need to take down the longer end yields and to that extent RBI buying from primary market is also possible,” said Das.

Ghosh said RBI needs to move beyond the traditional liquidity support. “I know that there is no provision in the RBI Act of any state purchase of corporate bonds but right now we need to move beyond the traditional liquidity support, which the RBI is providing to the market. We have to recalibrate the liquidity support, we need to fairly think because there has to be support to the corporate bond markets and the banks need to be incentivised for that. So, whether we can do an repo in the ‘AAA’ rate corporate bonds with an appropriate hair cut or we allow cash reserve ratio (CRR), statutory liquidity ratio (SLR) exemption for corporate bonds so that the banks can support that, or whether the banks can support the mutual funds through the repo and corporate bonds, I think these are all which RBI needs to consider,” he said.