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Photo: Reuters
Photo: Reuters

RBI sees gradual revival as covid cases increase

  • Governor Das says rising virus cases hamper efforts to reopen the economy
  • Das says global economic indicators such as manufacturing and services are showing signs of improvement

Reserve Bank of India (RBI) governor Shaktikanta Das said the country’s economic recovery will be gradual because of the unabated rise of coronavirus cases, but come what may, the central bank is “battle-ready" to take all steps necessary to restore growth.

The “efforts towards reopening the economy are confronted with rising infections", Das said at a public event on Wednesday. “High-frequency indicators of agricultural activity, the purchasing managers’ index (PMI) for manufacturing and private estimates for unemployment point to some stabilization of economic activity in the second quarter, while contractions in several sectors are also easing," he said, adding “India’s central bank stands battle-ready to take whatever steps are needed to be taken for the economy".

In recent estimates, RBI has said that the economy will continue to contract in the fiscal first half due to disruptions from covid-19.

The comments from the RBI governor on economic growth are in sharp contrast to views expressed by the finance ministry’s chief economic adviser, Krishnamurthy Subramanian, who predicted a V-shaped economic recovery although he maintained that it will be challenging to recoup losses from the recent economic contraction over the short term.

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Graphic: Mint

Citing RBI’s twin challenges of supporting growth while keeping inflation within range, Subramanian had said that recent indicators showed that retail inflation was easing, potentially leaving room for the central bank to cut rates further.

Das said global economic indicators such as manufacturing and services are showing signs of improvement, backed by policy stimulus by various governments, including India, where large surplus liquidity ensured mobilization of resources at the lowest borrowing costs in a decade. “Benign financing conditions and the substantial narrowing of spreads have spurred a record issuance of corporate bonds of close to 3.2 trillion in 2020-21 up to August," Das said.

Pointing to other measures adopted by the central bank to stabilize financial markets, he said steps such as the RBI’s open market operations (OMOs) have helped restore orderly functioning of the government security, or G-Sec, market, leading to softening of bond yields.

Although credit growth remains muted, investments by banks in commercial paper, bonds, debentures and shares of corporate bodies until 28 August increased by 5,615 crore, compared to a decline of 32,245 crore in the same period last year.

Das said the central bank continues to be worried about the vulnerability of non-banking financial companies (NBFC).

Citing the NBFC sector as a potential trouble spot in the economy, he said RBI has increased regulatory restrictions on NBFCs since the collapse of Infrastructure Leasing and Financial Services Ltd (IL&FS) in 2018. This includes the introduction of liquidity coverage and appointment of chief risk officers in these companies.

“Vulnerability of NBFC remains a concern. NBFCs are not at par with banks in terms of regulations. We don’t want a repeat of the crisis in another NBFC. In April 2019 MPC, I had said that it will be our endeavour to ensure that no large NBFC fails. Thereafter, we have been extensively monitoring the top 100 NBFCs," he added.

Das said RBI will focus on five key areas to assist a revival of the economy in the coming few months—human capital with specific emphasis on education and health, improving productivity, exports, which are linked to India’s role in the global value chain, tourism and food processing associated productivity gains.

“Education and skill development contribute less than 0.5% to our overall labour productivity growth. In order to reap the demographic dividend, we have to raise expenditure on education and acquisition of skills substantially…A World Bank study showed that an additional year of schooling increases earnings by 10% a year," said Das.

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