COVID SPIKE MAY HURT RBI’S INFLATION MATHS: ECONOMISTS
Rising Covid infections will hurt economic growth and push up inflation set off by lockdowns, warn economists. It is a catch-22 situation for the Reserve Bank of India (RBI). It will have to maintain its accommodative stance to buttress growth. It will also have to keep inflation in check.
Consumer price index (Cpi)-based inflation rose to 5.52 per cent in March, from 5.03 per cent in February. Core inflation was at 5.7 per cent.
Bond yields, though, have started pricing in some of that sticky inflation. However, the 10-year bond yield has remained low and stable as the central bank is targeting the 10-year segment as a signal rate. The 10-year bond yield closed at 6.01 per cent on Monday — flat from its previous close.
On April 15, when the bond market opens after a two-day public holiday, the central bank will be conducting its first G-sec Acquisition Programme (G-SAP) purchase of ~25,000 crore, in which it will also buy the 10-year bond.
“The yields in the 10-year segment are low because of the RBI bond-purchase support. But other longer-term yields are just about where they were at the end of the previous fiscal year. The market is not really reacting to the RBI’S G -SAP, but it is a technical correction on the 10-year segment,” said a bond dealer.
The underlying assumption is that the RBI may not be able to sustain its accommodative stance for long. But growth is a bigger concern now, as the RBI said in its monetary policy on April 7.
“While an elevated inflation trajectory rules out any rate-cut possibility in the foreseeable future, increasing Covid-led uncertainty on growth outlook will ensure the sustenance of an accommodative stance at least through the current fiscal year,” said Tirthankar Patnaik, chief economist, National Stock Exchange.
“The RBI’S focus is likely to remain on ensuring ample liquidity in the system to support the economy and ensure smooth execution of the government’s borrowing programme without hurting financial stability,” Patnaik said in his report.
The surge in infection could upset the inflation mathematics of the RBI, as some economists have already started revising their estimates.
“Given the deterioration in the Covid-19 dynamics, which has led to localised lockdowns/night curfews being announced in certain parts of the country, we worry that inflation could turn out to be higher in the months ahead than we had earlier anticipated,” wrote Deutsche Bank Chief Economist Kaushik Das.
“While a favourable base effect will be present between April and November, demand-supply mismatches could readily lead to higherthan-anticipated price increases,” Das wrote in his note.
Deutsche Bank changed its CPI inflation forecast to about 4.9 per cent for 2021-22, from 4.5 per cent earlier. The RBI’S own forecast is 5 per cent.
Rating agency Moody’s expects the resurgence in infections to pose a risk to the growth forecast “as the reimposition of virus management measures will curb economic activity and could dampen market and consumer sentiment”. However, the impact would be less severe than last year as the lockdowns are localised, not nationwide.
A higher-than-expected inflation and lower-than-expected industrial production give rise to the fear of stagflation, wrote brokerage firm Anand Rathi in its report.
However, “the overwhelming priority of macroeconomic policies in India and elsewhere remains the promotion of growth. With continued concerns regarding growth, the rise in retail inflation would be largely ignored by the RBI unless it breached 6 per cent for several months, which seems unlikely”, said the Anand Rathi Research report.