ECONOMY NOT AS HARD HIT AS FIRST WAVE, REVIVAL OF DEMAND KEY FOR RECOVERY: RBI
NEW DELHI: India’s economy has not moderated as much as it did during the first wave of the coronavirus, but uncertainties may act as a short-term deterrent and private demand will be key to revival, the Reserve Bank of India said on Thursday.
In its annual report, the central bank said the country’s growth prospects now essentially depend on how fast India can arrest its second wave of Covid-19 infections.
“For a self-sustaining GDP [gross domestic product] growth trajectory post-Covid-19, a durable revival in private consumption and investment demand together would be critical as they account for around 85% of GDP,” RBI said.
RBI said central and state government deficits could rise when revised estimates are released and high levels of deficit and debt could pose challenges in financing once private investment picks up.
It said its balance sheet increased by 6.99% in FY21 to ₹57.08 trillion, mainly reflecting its liquidity and foreign exchange operations.
MUMBAI : The Reserve Bank of India (RBI) said on Thursday that inflation remains a key concern, constraining monetary policy from utilizing any available room to support growth.
It pointed out that India needs to put more effort in order to mitigate supply-side driven inflation pressures. “Monetary policy will monitor closely all threats to price stability to anchor broader macroeconomic and financial stability while continuing with the accommodative stance,” RBI said in its annual report.
The monetary policy committee (MPC) would meet between June 2-4 and is expected to maintain the accommodative stance for the whole of calendar year 2021.
Inflation, measured by the wholesale price index, softened in 2020-21, there was no pass through to retail inflation. According to the RBI, the substantial wedge between wholesale and retail price inflation during the year pointed to persistence of supply-side bottlenecks and higher retail margins, underscoring the importance of supply management.
“The extent of retail price increase in the post-lockdown period was also much higher than the usual summer uptick in food prices. The gap between retail and wholesale price inflation—a proxy for retail margins or mark-ups also remained unusually high,” it said.
It believes that pressures from food items like pulses and edible oils are likely to persist in view of supply-demand imbalances, while cereals’ prices may continue to soften with the bumper foodgrain production in 2020-21.
“Crude oil prices have picked up on optimism of demand recovery and continuation of OPEC plus production cuts; and are expected to remain volatile in the near-term,” it said, adding that as pandemics typically leave markets less competitive, the increase in number of active covid-19 cases with the beginning of second wave along with the associated effects on supply chains could also affect inflation going forward.
The RBI said that the monetary policy in 2020-21 had to deal with the twin challenge of reviving growth from the ravages of Covid-19 while also ensuring that inflation eased from above the upper tolerance band to align with the target. As part of its inflation-targeting mechanism, the government has retained the RBI’s flexible inflation target in the 2-6% band for the five years through March 31 2026.
Transmission to banks’ deposit and lending rates improved significantly on the back of surplus liquidity conditions and the mandated external benchmark system of the pricing of loans for specified sectors, it said.
However, while the pace of recovery in 2020-21 turned out to be faster than anticipated, RBI said that the outlook is weighed down by several uncertainties and would depend upon the evolving trajectory of infections and vaccinations.
“A durable recovery will be dependent on continued policy support,” it said.