Is RBI being unduly optimistic?

The Reserve Bank of India’s Monetary Policy Committee (MPC), which has been entrusted with framing the country’s monetary policy has recently met virtually to assess the country’s monetary situation, and its outcome was all but expected. The MPC left policy rates — the repo and the reverse repo rates — unchanged, and announced a special window for Medium, Small and Micro Enterprises (MSMEs) and contact-intensive sectors like hospitality, tourism, among others.

The members of the MPC, who met amid the second wave of coronavirus cases, however, believe that businesses have adapted to working amid pandemic. So the impact of the second wave on the country’s economic growth, they believe, would be limited. In sync with this assessment, the MPC revised its forecast for the country’s economic growth from the previous 10.5 per cent to 9.5 per cent. It suggests that the massive second Covid wave would shave off just one percentage point from the country’s economic growth.

Unlike the previous forecast of 5.4 per cent growth in Q3 and 6.2 per cent of the current financial year, the RBI’s revised assessment claims that the economy would grow by 7.2 per cent in Q3 and 6.6 per cent in Q4. This optimistic view appears to be largely based on a better handling of next Covid waves, if any, by the government and a faster vaccination programme. The RBI flagged the prospect of Covid-19 infections in rural areas and lower urban demand could pose a downside risk. But it sees a silver lining in a normal monsoon, the resilience of the farm economy, and the gathering momentum of global recovery. While the RBI may be correct in its assessment, it appears to have glossed over the impact of higher healthcare spending on the overall indebtedness of people and a diminished physical ability of Covid-recovered people on their earning capacities.

While the RBI may

be correct, it appears to have glossed over the impact of higher healthcare spending on the overall indebtedness of

people.