Bumpy road: RBI says Q2 GDP will fall 8.6%, flags three risks

Even as it estimated GDP would contract by just 8.6% year-on-year (y-o-y) in the September quarter following the 23.9% y-o-y contraction in the June quarter, Reserve Bank of India (RBI) on Wednesday highlighted three primary risks to recovery.

The first, it pointed out, was a generalisation of inflation which has been unrelenting with no signs of waning. The second was the global second wave of Covid-19, and third, a spillover of stress intensifying among households and corporations — that has been delayed but not mitigated — to the financial sector. “Should external demand collapse again as commodity prices seem to foretell, the recent recovery in exports could become stillborn,” the central bank observed.

RBI cautioned that irrational exuberance in domestic equity markets had spilled over to October, driven by monetary and fiscal policy measures undertaken in the context of the pandemic as well as better than expected corporate earnings in Q2FY21.

The central bank noted that while indicators of aggregate demand are still arriving, there are indications of a pick-up as the festival season gathers intensity.“At a time when global economic activity is besieged by the outbreak of the second wave of COVID-19, incoming data for the month of October 2020 have brightened the near-term outlook for the Indian economy and stirred up consumer and business confidence. The RBI said corporate sales remained in contraction in Q2, although at a moderated pace relative to Q1. “With other income increasing moderately, net profits rose strongly, mirroring the behaviour of operating profits, which suggests that gross value added by the corporate sector in Q2 may surprise on the upside,” it said.