The recovery that has been underway in the Indian economy with the ebbing of the second wave of the pandemic is encountering headwinds from a rapid surge in infections in a third wave marked by the rapid transmissibility of the Omicron variant, cautioned the authors of an article in the Reserve Bank of India’s latest monthly bulletin.

Consequently, mobility indicators exhibited a sequential moderation in January.

As per the article ‘State of the Economy’, put together by 21 RBI officials, Google mobility indices dropped below the baseline numbers for retail and recreation activities and around workplaces as offices made a quick transition to work from home protocols (up to January 8, 2022)

The authors noted that Apple mobility index tumbled across all major cities, although it remained above its pre-pandemic level. Electricity generation accelerated through January so far, reaching pre-pandemic levels

“As the world stepped into the new year, the path of the recovery in India as in the rest of the global economy encountered headwinds from a rapid surge in infections due to Omicron,” the authors said.

Nonetheless, amidst upbeat consumer and business confidence and an uptick in bank credit, aggregate demand conditions stay resilient, while on the supply front, rabi sowing has exceeded last year’s level and the normal acreage. Manufacturing and several categories of services remain in expansion.

More recently, expectations that Omicron may turn out to be more of a flash flood than a wave has brightened near-term prospects, the article said.

The officials said: “Overall economic activity in India remains strong, with upbeat consumer and business confidence and upticks in several incoming high frequency indicators.

“...Alongside, monetary and credit conditions are improving with bank credit picking up in a gradual but sustained manner.”

They observed that inflation continues to mount across geographies amidst disruptions in production, supply chains, and transportation. Consequently, the divergence between monetary policy stances across jurisdictions has widened.

“There are indications that supply chain disruptions and shipping costs are slowly easing, although the waning of inflation may take longer. This provides a window of opportunity to focus all energies on accelerating and broadening the global recovery,” the officials said.

The article noted that the effective reverse repo rate (the interest that banks earn for parking surplus liquidity with RBI) moved closer to the repo rate. Taking a cue from the higher cut-offs in the VRRR (variable rate reverse repo) auctions, money market rates hardened.

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