The tapering of the second wave, coupled with an aggressive vaccination push, has brightened near-term prospects for the Indian economy, and the Indian economy may have grown 22.1 per cent in the April-June quarter, the Reserve Bank of India (RBI) said in an article on Thursday.
“A solid increase in aggregate demand is yet to take shape. Even with a 9.5 per cent GDP growth in 2020-21, there will be substantial slack in the economy and demand pressures may take some more time to become evident,” the central bank said in its state of the economy report, part of the July bulletin.
“On the supply side, agricultural conditions are turning buoyant with the revival in the monsoon, but the recovery of manufacturing and services sectors has been interrupted by the second wave,” the RBI noted.
However, in this context, the central bank reiterated that a pick-up in inflation is driven largely by adverse supply shocks, such as in case of protein-rich food items, edible oils and pulses, and sector-specific demand-supply mismatches caused by the pandemic. “These factors should ease over the year as supply side measures take effect.”
Even as the inflation ruled above the tolerance band during June-November 2020 and has again moved above the upper tolerance threshold in May and June 2021 (about 6.30 per cent), the sense now is that “inflation will persist at these elevated levels for some months before easing in the third quarter of 2021-22 when the kharif harvest arrives in markets.”
Even as steps have been taken to address specific supply-side measures, “but more needs to be done,” the report said.
On the pandemic, the report cited a mathematical model suggesting that in the best and normal course, the third wave could just be a ripple and life would return to normalcy by August. However, in its pessimistic scenario, which assumes that a new 25 per cent more infectious virus other than Delta+ spreads in August, there will be a bigger impact.
“If there is no such mutant, the third wave will be a ripple and comparable to the first. If there is an immunity-escape mutant, however, all the above scenarios will be invalid,” it said.
Meanwhile, a lull in infections should be taken used an opportunity to prepare for a possible third wave.
The demand condition though should improve, as in evident from strong sets of data coming from various sectors such as e-way bills, freight, electricity generation and pick up in housing. The google mobility index is now above the same period last year as the states ease the lockdowns in phases.
Two-thirds of net foreign capital inflows received by India during in the fourth quarter of the last fiscal were absorbed domestically, instead of passively adding back to reserves. Foreign exchange reserves, meanwhile, have reached an all-time high of $610 billion on July 2, equivalent to 18.4 months of 2020-21 imports.
“The pick-up in the investment rate, if sustained, will improve the outlook for India’s potential output and as a result, the nation’s external solvency. The resilience of remittances in the face of the pandemic also augurs well for the prospects for gross disposable income and hence domestic consumption,” it said.
“Aggregate demand conditions are recovering, spurred by unlock measures and the pace of vaccination.”
Internationally though, a couple of concerns have emerged that is pushing up inflation. For example, freight rates have risen more than five times in recent times. The report also pointed out a sharp rise in domestic fuel prices, which is also pushing up kerosine and cooking gas prices.
The report also touched upon the volatility in the bond market globally, including in India.
“At stake for markets is the orderly evolution of financial prices. At stake for central banks is the weak economy which would not be able to withstand liquidity and rate tightening in its current state of health, and the fragile recovery that is being painstakingly scripted could be at risk.”
The central banks have put their inflation credibility on the line, “challenging the market’s view by renewing their commitment to stay accommodative or to undertake a very gradual, multi-year adjustment. The key, as in the rest of life, is to strike the right balance,” it said.
Disclaimer: This post has been auto-published from an agency/news feed without any modifications to the text and has not been reviewed by an editor.
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