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Business News/ Economy / RBI article flags inflationary threat from fresh covid surge
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RBI article flags inflationary threat from fresh covid surge

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, financial stability is the way forward, says RBI

As part of its inflation-targeting mechanism, the government has retained RBI’s flexible target in the 2-6% band till March 2026.Premium
As part of its inflation-targeting mechanism, the government has retained RBI’s flexible target in the 2-6% band till March 2026.

MUMBAI : The second wave of covid-19 in India, if left uncontrolled, could lead to prolonged restrictions on movement and supply chain disruptions with consequent inflationary pressures, the Reserve Bank of India (RBI) said on Monday.

Written by a team led by deputy governor Michael Debabrata Patra, as part of the April bulletin, the article was accompanied by the usual disclaimer that views expressed are those of the authors and do not necessarily reflect the views of the central bank.

Inflation measured by the consumer price index (CPI) came in at 5.5% in March, higher than 5% in February owing to a sharp rise in food and fuel inflation. As part of its inflation-targeting mechanism, the government has retained RBI’s flexible inflation target in the 2-6% band for the five years through 31 March 2026.

“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," it said.

The second wave has been more challenging than the first one last year with mutant varieties of the virus wreaking havoc across the country. The lack of timely availability of medical-grade oxygen and covid-specific medications have accentuated the troubles of the nation where less than 2% of the population has received both vaccine doses. This has been accompanied by localized lockdowns in several states like Maharashtra and Delhi, a trend RBI fears could lead to inflationary pressures.

“Growing infections and consequent restrictions, though still local and regional in nature, have imparted high uncertainty to the outlook" it said.

With the second wave of covid-19 infections forcing authorities to restrict the movement of people, activity in contact0intensive sectors such as hotels, airlines and travel is set to suffer again, the article said. It cited the example of the United Kingdom (UK), which recently added India to its travel ban list, to show how this will further affect domestic travel and tourism industries. Since the UK travel bank, several other countries have imposed similar restrictions on flights from India, given the high caseload.

“Going forward, the calculation of year-on-year CPI inflation prints for April and May 2021 is subject to uncertainty given that April and May CPIs a year ago were not based on actual price data collections but were imputed," it said.

On the brighter side, India’s economic activity in India is holding up against covid-19’s renewed onslaught, it said. Apart from contact-intensive sectors, activity indicators largely remained resilient in March and grew beyond pre-pandemic levels. The central bank bulletin also pointed out that over the last month, there were two positive developments on the prices front. Firstly, there is an increasing likelihood of a normal south-west monsoon in 2021, and secondly, the retreat of crude oil prices from a peak level of around $70 per barrel could result in some softening in domestic pump prices.

“Coordinated policy actions by the centre and states to rationalize high taxes on petrol and diesel can help bring relief to households by lowering pump prices and mitigating second-round effects on the economy," it said, adding that upside risk to inflation emanating from input price pressures in manufacturing and services, as evidenced from the purchasing managers index (PMIs), remain.

Meanwhile, likening RBI’s upfront disclosure on purchases of government securities to the mythical weapon of Brahmastra, the article said RBI stepped off into hitherto uncharted terrain. Named G-SAP or government security acquisition programme, the article expects it to bring about an ebbing of bond market tempests, especially the unwinding of trade positions caught offside and out of line with fundamentals.

“It involved a testing judgment call; now, the die is cast. And it is named G-SAP 1.0 with a purpose – it’s just a beginning," it said.

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ABOUT THE AUTHOR
Shayan Ghosh
Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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Published: 26 Apr 2021, 08:03 PM IST
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