New covid cases are on a declining trend, but with restrictions likely to be eased only gradually, the sharp slowdown in domestic demand is set to weaken revival beyond the June quarter, Moody's Analytics said
NEW DELHI :
Moody’s Analytics on Friday said the Reserve Bank of India (RBI) is expected to maintain an accommodative stance over the next two quarters despite transitory inflation pressures, while expanding liquidity measures to support recovery.
RBI in its latest monetary policy review kept its benchmark repo rate unchanged at 4% as expected. The reverse repo rate and the marginal standing facility rate were also held steady at 3.35% and 4.25%, respectively. The central bank, however, cut its growth forecast for FY22 to 9.5% in light of the strong resurgence of covid-19, which resulted in most states imposing lockdowns. “New cases are on a declining trend, but with restrictions likely to be eased only gradually, the sharp slowdown in domestic demand is set to weaken revival beyond the June quarter. RBI is expected to maintain an accommodative stance over the next two quarters despite transitory inflation pressures, while expanding liquidity measures to support recovery," Moody’s Analytics said in a statement.
India’s recovery has been disrupted by the strong resurgence of covid-19 cases since late March, which caused several states to impose shutdowns to contain localized outbreaks. So far, the central bank has responded with debt moratoriums and increased liquidity support worth ₹500 billion to ramp up healthcare infrastructure. More steps were taken in this direction on Friday, as the RBI expanded liquidity provisions for covid-hit sectors such as hotels and tourism and for some of the hard-hit small and medium-sized businesses. The RBI also expanded its quantitative easing through additional bond purchases to keep borrowing costs anchored.
“The near-term outlook for the Indian economy is still mired in uncertainty. Although daily cases are now on a declining trend (down to under half of its peak at 400,000 cases in early May), most states have extended localized lockdowns by a few weeks. With restrictions expected to be eased even more gradually than previously assumed, there is an increasing risk that the hit to consumption and employment will be more prolonged. On the production side, too, labour shortages and sourcing constraints are impediments which will not only weaken domestic supply, but also exacerbate costs and fuel inflation pressures in the short term," Moody’s Analytics said.
Under these circumstances, the RBI will continue to maintain an accommodative stance as it prioritizes recovery and financial stability, but is unlikely to go significantly beyond mobilizing additional liquidity to support cash-strapped enterprises, the analytics firm said. “While it retains some room for an additional rate cut, short-term inflation concerns are likely to limit the scope for the same. Even if this option is considered, further easing will most likely be delayed beyond June, at a time when the economy can gain more traction from lower borrowing costs. The RBI is, therefore, likely to maintain the policy rate at 4% until August, but follow up its support with another round of quantitative easing if required and possibly an extension of its current loan restructuring program to contain a sharp decline in asset quality," it added.