RBI in its biannual monetary policy report said second-order effects of the coronavirus pandemic could hurt India’s economy
RBI said that its inflation outlook looks benign, with risks around inflation project being balanced
The outlook for the Indian economy has been drastically altered by the coronavirus outbreak, the central bank said in its biannual monetary policy report, without specifying how fast it expects the country to grow, but added that its forecast would depend on the intensity, duration and spread of the pandemic.
The pandemic is ravaging the world at a time the Indian economy was showing incipient signs of a recovery, but covid-19 now “hangs over the future, like a spectre," the Reserve Bank of India (RBI) said on Thursday.
The covid-19 outbreak in India and the ensuing 21-day nationwide lockdown has ground economic activity to a near halt, and the second-order effects of the pandemic because of a drastic slowdown in global trade and growth could hurt the country further.
“More immediately, spillovers are being transmitted through finance and confidence channels to domestic financial markets. These effects and their interactions would inevitably accentuate the growth slowdown," RBI said in its report.
According to the professional forecasters’ survey, conducted by RBI before the nationwide lockdown was announced, gross domestic product (GDP) growth was expected to quicken to 6.1% in the fourth quarter of fiscal year 2021 from 4.6% in the year earlier.
With covid-19 having spread to more than 200 countries, the global economy could slip into recession in 2020 from a growth of 2.9% in the previous year.
RBI said that its inflation outlook looks benign, with risks around inflation project being balanced. With softening of food prices, sharp fall in crude prices and normal monsoon, RBI expects inflation for fiscal year 2021 to be in the range of 3.6-3.8%.
“Even as forecasts are hazardous in this environment, the RBI is mandated to provide inflation forecasts. Taking into account initial conditions, signals from forward-looking surveys and estimates from time series and structural models, CPI (consumer price index) inflation is tentatively projected to ease from 4.8% in Q1:2020-21 to 4.4% in Q2, 2.7% in Q3 and 2.4% in Q4, with the caveat that in the prevailing high uncertainty, aggregate demand may weaken further than currently anticipated and ease core inflation further, while supply bottlenecks could exacerbate pressures more than expected," the report said.
However, the central bank warned that the impact of covid-19 on inflation is ambiguous, with a possible decline in food prices likely to be offset by potential cost-push increases in prices of non-food items due to supply disruptions.
For its projections, the RBI’s baseline scenario assumed crude oil prices (Indian basket) to average around $35 per barrel during 2020-21, fiscal deficit as a percentage of GDP for the Centre at 3.5%, and the combined GDP deficit at 6.1%. Besides, an exchange rate of 75 per dollar, a normal monsoon, but a global growth contraction in 2020.