The Reserve Bank of India (RBI) has forecast inflation to collapse to 2.4% in the fiscal fourth quarter, albeit largely forced, amid a pronounced slump in overall demand and prices of vegetables, creating enough room for steep interest rate cuts. But
RBI said the
Covid-19 epidemic looms as a 'spectre' that could make a mockery of all calculations.
The second round effects of Covid-19 could be more 'severe' as it could feed through the global trade channel, demolishing the confidence of investors and consumers because of the volatility in financial markets, the RBI said in its Monetary Policy Report for the fiscal.
This report usually accompanies the Monetary Policy Committee's (MPC) interest rate decision. But it was postponed this time since the MPC meet was advanced to March 27 so that the panel could take emergency measures because of the Covid-19 triggered collapse in financial markets and an economic lockdown.
"In these conditions, forecasts are hazardous as they are subject to large revisions with every incoming data on the pandemic," the regulator said in the policy note. "The RBI Act, however, enjoins the Reserve Bank to publish and explain in the MPR, inter alia, the forecasts of inflation for 6-18 months from the date of its publication."
The RBI, which skipped providing estimates during the March 27 policy meeting, has forecast Consumer Price Index (CPI) inflation at 2.4% in the fourth quarter of this fiscal, halving from 4.8% in the first quarter. The MPC has been mandated to keep CPI at 4 percent, with a two percentage point band on either side.
"Expectations are high for more action, particularly as risk-free yields stay sticky," said Radhika Rao, economist at DBS. "These are still early days to gauge the impact of the lockdown on real data, as most are released with a lag. The lockdown was a prudent move to arrest the transmission, but is likely to hurt
growth in the short-term."
Economists have slashed their growth as well as inflation forecasts for the past fiscal and the next one as the Covid-19 induced lockdown has shuttered economic activity. DBS' Rao, for instance, Forecasts FY20 GDP forecast to 1.5%, and for fiscal 21 at 4.5%.
To alleviate the pressure on the
economy, the MPC in its meeting last month cut the repo rate, the rate at which it lends to banks, by 75 basis points to 4.4 percent, a record low. It also announced liquidity measures that would pump in more than Rs. 3.7 lakh crore into the system.
“A war effort has to be mounted and is being mounted to combat the virus, involving both conventional and unconventional measures in continuous battle-ready mode,” governor Shaktikanta Das said on March 27. “Life in the time of Covid-19 has been one of unprecedented loss and isolation. Yet, it is worthwhile to remember that tough times never last; only tough people and tough institutions do.”
Those sentiments are echoed in the latest report, which said the longer the disruption, the greater the damage to the economy.
"Second round effects would operate through a severe slowdown in global trade and growth," the report said. "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."
The central bank said that given the dislocation caused by the lockdown, even collecting data to measure inflation would be difficult.
"Risks around the inflation projections appear balanced at this juncture and the tentative outlook is benign relative to recent history," the report said. "But Covid-19 hangs over the future, like a spectre."