Category: Banking & Finance

The RBI’s output loss is factored into its revised GDP forecast in the latest monetary policy estimates, where it slashed growth projections from 10.5% to 9.5%.

The projection was on the assumption that real GDP will grow by 18.5% in the first quarter, which is on a much lower base given the contraction last year.

“By current assessment, the second wave’s toll is mainly in terms of the hit to domestic demand. On the brighter side, several aspects of aggregate supply conditions – agriculture and contactless services are holding up, while industrial production and exports have surged amidst pandemic protocols,” the central bank said.

A loss of economic output may not have a direct corelation with the GDP, but points to some loss in the value-addition across the economy, it said.

Deposits, cash depleting

The RBI said the rate of decline in deposits has been higher, indicating that household savings have dropped in sharp contrast to the first wave. “Additionally, currency holding with the public has also decelerated significantly to 1.7% during April 2021 in comparison to the growth of 3.5% a year ago, implying heavy outgo towards Covid-induced medical expenditure.”

The move ahead

The report highlights the advantages of repurposing and reprioritising revenue and expenditures to extract “bang for the buck”. The report said that the public sector can lead the private sector in unlocking growth opportunities. In addition, it can partner the private sector, and step back to allow the private sector to take the lead in sunrise areas.

“While has tested the limits of flexibility in fiscal policy frameworks in India as in the rest of the world, it has offered a unique opportunity to redefine fiscal policy in a manner that emphasises ‘how’ over ‘how much,” the report said.

The report, authored by RBI deputy governor M D Patra highlights the finance ministry estimates that to achieve herd immunity and regain recovery momentum, the target population to be vaccinated is 70 crore by September 2021 and around 113 crore more doses are needed. Accordingly, around 93 lakh vaccinations are required per day to achieve the herd immunity.

Covid wave weakening

RBI observed that the second wave is rolling back almost as fast as it rolled in. On June 14, the daily cases fell to a seventh of their peak of 4,14,188 a month ago (May 6). The seven-day average, which smooths out daily fluctuations, also declined by a fifth from its peak of close to 4 lakh. This is also reflected in the doubling rate, which increased to 247 days from its trough of 34 days at the end of April.

Supply bottlenecks

While the surge in inflation may have a lot to do with pandemic base effects, it is also fuelled by years of underinvestment having made the supply response less dynamic, exacerbated by supply chain bottlenecks, the RBI said. “In this situation, monetary policy is hostage to its own stance and loose financial conditions that it creates will cause excessive risk taking in markets even as inflation migrates upwards,” it said.