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The Reserve Bank of India (RBI) on Wednesday cautioned of uncertainties clouding its outlook with the recent surge in covid-19 cases sweeping the country, even as it retained the country’s gross domestic product (GDP) growth projection for FY22 at 10.5%.

The rise in global commodity prices, coupled with the volatility in financial markets, accentuates risks and lockdowns in certain states could dampen the gradual revival of growth impulses, RBI governor Shaktikanta Das said. Besides, the monetary policy committee said consumer confidence has dipped with covid-19 making a strong comeback in certain states.

The central bank has retained its growth projection, while giving a quarterly breakup for the financial year. The breakup shows that it has lowered projected growth in Q3 of FY22 to 5.4% from the 6% announced in February. The economy is now expected to expand 26.2% in Q1, 8.3% in Q2, and 6.2% in Q4.

“The recent surge in infections has, however, imparted greater uncertainty to the outlook and needs to be closely watched, especially as localized and regional lockdowns could dampen the recent improvement in demand conditions and delay the return of normalcy," Das said. The MPC has decided to keep its policy accommodative to support and nurture the recovery. The stance of monetary policy will remain accommodative till the prospects of sustained recovery are well secured while closely monitoring the evolving outlook for inflation, he said.

The focus must now be on containing the spread of coronavirus and economic revival, according to the RBI governor. A key aspect of this strategy, he said, will be to strengthen the bedrock of macroeconomic stability that has anchored India’s revival from the pandemic. “Public investment in key infrastructure sectors is a force multiplier with historically proven ability to revive the broader economy by directly enhancing capital stock and productivity, and by attracting private investment," Das said.

Other positive signs for economic growth includes fast tracking the vaccination programme and gradual release of pent-up demand. The MPC banked on the government’s plan to increase infrastructure spend. It also banked on the expansion in the production-linked incentive (PLI) scheme and rising capacity utilisation from 63.3% in the September quarter to 66.6% in the December quarter.

The rate-setting committee of the central bank also laid down other reasons behind its cautious optimism on growth projections. Rural demand remains buoyant and record agriculture production for FY21 will add to the resilience, it said. Besides, demand from urban centres has also been improving as economic activity picks up and the ongoing vaccination drive should act as a catalyst.

The central bank’s messaging on growth is very clear, economists said. “In our view, the overall message from today’s meeting was one of quiet confidence about growth amid rising vaccination and despite the recent surge in covid-19 cases, which should allow the RBI to gradually normalize policy, but also ensure that borrowing costs do not rise abruptly," said Rahul Bajoria, chief India economist, Barclays.

The MPC cited the second advance GDP estimates for FY21 of the National Statistical Office (NSO), which pegged economic contraction at 8% for FY21. That apart, high frequency indicators, such as vehicle sales, railway freight traffic, toll collections, goods and services tax (GST) revenue, e-way bills, and steel consumption, suggest that gains in manufacturing and services activity in Q3 has extended into Q4.

State-wide restrictions on mobility will impact growth, according to Sameer Narang, chief economist, Bank of Baroda. Narang projected FY22 growth at 11.5% and said there is a downside risk emanating from the second wave. “The services sector and within it contact-intensive services such as restaurants and travel industry will see the maximum impact," he said.

Das said the world is gradually recovering from the slowdown, but is still uneven and supported by vaccination drives, sustained accommodative monetary policies, and a further sizeable fiscal stimulus. “World output is projected by the Organisation for Economic Co-operation and Development (OECD) to reach its pre-pandemic level by mid-2021, though it will be largely contingent on the pace of vaccine distribution and its efficacy against emerging variants of the virus. Stronger external demand should support India’s exports and investment demand," he said.

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