Covid-19 resurgence may bring back inflation pressure, says Reserve Bank
Central bank says economic activity holding up admirably against 2nd wave
The RBI on Monday warned that the resurgence of the pandemic could bring back inflationary pressures in the country. “The resurgence in Covid-19, if not contained in time, risks protracted restrictions and disruptions in supply chains with consequent inflationary pressures,” RBI said in its state of the economy report, a part of the bulletin for April. “Pandemic protocols, speedier vaccination, ramping up hospital and ancillary capacity, and remaining resolutely focused on a post pandemic future of strong and sustainable growth with macroeconomic and financial stability is the way forward,” the report said.
The Reserve Bank of India (RBI) on Monday warned that the resurgence of the Covid-19 pandemic could bring back inflationary pressures in the country.
“The resurgence in Covid-19, if not contained in time, risks protracted restrictions and disruptions in supply chains with consequent inflationary pressures,” RBI said in its state of the economy report, a part of the bulletin for April.
“Pandemic protocols, speedier vaccination, ramping up hospital and ancillary capacity, and remaining resolutely focused on a post pandemic future of strong and sustainable growth with macroeconomic and financial stability is the way forward,” the report said.
Vaccine coverage has been progressing at a glacial and unequal pace in the world. Specifically for India, the vaccination target of 300 million by end-august will require an average of 3.5 million shots per day, about 13 per cent higher than the current pace, it noted.
However, the government has now decided to inoculate all those aged above 18 and the monsoon is expected to be good. This should augur well for the economy, RBI said.
The central bank stepped into hitherto uncharted terrain with its government securities acquisition programme, or G-SAP, as it committed upfront for the first time to acquire a specified amount of securities within a specified time period. RBI will buy ~1 trillion worth of bonds from the secondary market in the June quarter under this programme and there will be more purchases in the quarters to come.
The programme is not monetisation of deficit, RBI said, but it is different from open market operations in that it “cedes discretion in the interest of supporting the market; it delivers on the RBI’S promise of sustaining comfortable liquidity conditions in a flexible, state-contingent manner regardless of market movements; it helps market participants plan their engagement with the borrowing programme better.”
Nevertheless, there are risks of asset bubbles, currency depreciation and capital flight associated with it, “but the balance of risks lies in favour of G-SAP 1.0, engendering congenial prospects for financial conditions and paving the way for a durable economic recovery.”
The G-SAP will fix the “unwinding of trade positions caught offside and out of line with fundamentals,” RBI hoped.
At the same time, the central bank suggested it was in no hurry to withdraw stimulus too soon. Inflation is less sensitive to demand pressures than once feared, and central banks will lean towards growth in pandemic times, as inflation is still only catching up.
“But when markets cannot keep the faith and take the inverse bet — that monetary policy cannot stay loose for long — they are front running the economy,” it said, putting the onus on the markets on monetary policy tightening by pushing up yields.
RBI’S report claimed that economic activity in India is holding up “admirably against Covid-19’s renewed onslaught.”
“Much attention has been drawn to the wilting of incoming data in the face of the second wave and localised restrictions. Yet, it is important to note that it is the sentiment indicators that have moderated. Apart from contact-intensive sectors, activity indicators largely remained resilient in March and grew beyond prepandemic levels on the back of strong momentum, rather than statistical base effects,” it said.