COVID-19 hangs over the future, like a spectre: RBI report

COVID-19 will impact economic activity in India directly due to lockdowns, and through second round effects operating through global trade and growth, cautioned the Reserve Bank of India (RBI) in its Monetary Policy Report (MPR).

While efforts are being mounted on a war footing to arrest its spread, the report assessed that COVID-19 would impact economic activity in India directly through domestic lockdown. Second round effects would operate through a severe slowdown in global trade and growth, it added.

“More immediately, spillovers are being transmitted through finance and confidence channels to domestic financial markets.

“These effects and their interactions would inevitably accentuate the growth slowdown, which started in Q1 (April-June):2018-19 and continued through H2 (October-March):2019-20,” the report said.

Overall, the report observed that apart from the continuing resilience of agriculture and allied activities, other sectors of the economy will be adversely impacted by the pandemic, depending upon its intensity, spread and duration.

Forecasting inflation and growth challenging

“Relatively modest upsides are expected to emanate from monetary, fiscal and other policy measures and the early containment of COVID-19, if that occurs. Such uncertainties make the forecasting of inflation and growth highly challenging,” the RBI said.

At the same time, the report emphasised that significant monetary and liquidity measures taken by the Reserve Bank and fiscal measures by the government would mitigate the adverse impact on domestic demand and help spur economic activity once normalcy is restored. However, COVID-19 hangs over the future, like a spectre, it added.

Against this backdrop and especially, the highly fluid circumstances in which incoming data produce shifts in the outlook for growth on a daily basis, the MPR underscored that forecasts for real GDP growth in India are not provided here, awaiting a clear fix on the intensity, spread and duration of COVID-19.

Inflation

While headline inflation has peaked and vegetable prices are on the ebb, the RBI observed that the impact of COVID-19 on inflation is ambiguous relative to that on growth, with a possible decline in prices of food items being offset by potential cost-push increases in prices of non-food items due to supply disruptions.

The headline inflation had stayed above the upper tolerance band of the inflation target band during December 2019-February 2020, led by a spike in vegetable prices.

Taking into account initial conditions, signals from forward-looking surveys and estimates from time series and structural models, CPI (consumer price index) the RBI said inflation is tentatively projected to ease from 4.8 per cent in Q1 (April-June):2020-21 to 4.4 per cent in Q2 (July-September), 2.7 per cent in Q3 (October-December) and 2.4 per cent in Q4 (January-March).

This projection comes with the caveat that in the prevailing high uncertainty, aggregate demand may weaken further than currently anticipated and ease core inflation further, while supply bottlenecks could exacerbate pressures more than expected.

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