Downside risks for FY21 significant as duration of pandemic is uncertain: RBI

A full restoration in economic activity would be contingent upon the support for robust health infrastructure, recovery in demand conditions and fixing of supply dislocations, it said.

The exact duration of how long COVID-19 pandemic will last is still uncertain and resulting in significant downside risks to growth in FY21, the Reserve Bank of India said on Friday. The RBI had earlier said the country’s GDP will contract in FY21, but did not give any number on the same, even as analysts are pegging a negative growth of up to 9.5 per cent.

“For the fiscal year as a whole, there is still heightened uncertainty about the duration of the pandemic. As such, the downside risks to growth remain significant,” the RBI said in the half-yearly Financial Stability Report (FSR) released on Friday.

A full restoration in economic activity would be contingent upon the support for robust health infrastructure, recovery in demand conditions and fixing of supply dislocations, it said. Additionally, the state of global factors like trade and financial conditions will also have a bearing on the recovery, the central bank said.

“The near-term economic prospects appear severely impacted by lockdown induced disruptions to both supply and demand side factors, diminished consumer confidence and risk aversion,” it noted. Despite the steps taken by financial sector regulators and the government to ensure financial intermediation functions normally, and distress faced by disadvantaged sections of society is mitigated, the downside risks to short term economic prospects were classified as high.

Even though borrowing costs have ebbed and illiquidity premia have shrunk, risk aversion and lackluster demand have impeded the fuller flow of finance from both banks and non-banks into the economy, the RBI said. It can be noted that India has been put under lockdown from March 25 and is yet to be unlocked fully. The lockdowns have restricted economic activities, affecting the overall GDP.

The RBI has cut rates by 1.15 per cent in two moves and the government has announced a Rs 21 lakh crore stimulus package to help reverse the pains.  “The COVID-19 pandemic is unprecedented in its pan global impact and the toll it is taking on life and livelihood,” the FSR said, adding the financial markets have broadly stabilised in response to fiscal and monetary stimulus in India.