Economic revival still fragile and far from broad based: RBI

Economic revival is still fragile and far from being broad based, but the urban economy is joining its rural counterpart in pushing up demand and making the outlook brighter than what it was a few months ago.

Reserve Bank of India Governor Shaktikanta Das said that central bank would persevere with its paramount objective of reviving the economy with some additional measures such as providing liquidity support to targeted sectors, deepen financial markets and make rules with a view to conserve capital among banks and NBFCs; while passing the buck to the fiscal policy maker to address the supply-side disruptions and the impact of indirect taxes on rising consumer prices.

“We must turn our attention to nurturing the recovery beyond the meeting of pent-up demand and focus on setting it on a firm trajectory of sustained, high quality growth,” the monetary policy head said, stressing upon the need for more efforts to mitigate supply-side driven inflation pressures.

“A small window is available for proactive supply management strategies to break the inflation spiral being fueled by supply chain disruptions, excessive margins and indirect taxes,” he said.

RBI has projected the GDP to contract by 7.5% in FY21, revising its October projection of a 9.5% fall. The third quarter and fourth GDP prints are projected to be positive at 0.1% and 0.7% respectively. It projected CPI print at 6.8% for the third quarter, 5.8% for the fourth quarter and 5.2-4.6% in the first half of next fiscal.

The upward revision of both the growth and inflation forecasts might be somewhat puzzling and could mean that the RBI is willing to tolerate higher inflation as long as growth impulses become firmly entrenched, HDFC Bank chief economist Abheek Barua said.

The Governor said that the signs of recovery are far from being broad-based and are dependent on sustained policy support. “The recovery in rural demand is expected to strengthen further, while urban demand is gaining momentum as unlocking spurs activity and employment, especially for labour displaced by COVID-19,” he added.

The consumer price index (CPI) rose 7.6% in October 2020 while it is likely to remain sticky despite better harvest of winter crops.

“This constrains monetary policy at the current juncture from using the space available to act in support of growth,’ Das said, announcing status quo on policy rates while deciding to continue with the accommodative stance of monetary policy as long as necessary – at least through the current financial year and into the next year – to revive growth on a durable basis. He however expressed optimism with the economy showing signs of faster revival than what was anticipated earlier and with more sectors joining the multi-speed upturn.

Consumer confidence has turned optimistic with expectation of successful vaccine trials even as concerns over a possible rise in infections in some parts of the country, prompting some local containment measures, remains.

“We can hope that signs of recovery in Q2 and positive growth projected for H2 will improve debt servicing capacity of corporates going ahead,” Indian Bank chief executive Padmaja Chunduru said.

Corporate results for the second quarter highlighted recovery in demand and profit margins. Business assessment of manufacturing firms has entered the expansion zone after remaining in contraction in the last two quarters.