With the nationwide lockdown and the global slowdown adversely impacting economic activity, the Reserve Bank of India (RBI) Thursday stated that risks around inflation projections appear balanced at this juncture but “COVID-19 hangs over the future like a spectre”.
In its Monetary Policy Report, the RBI observed the ongoing lockdown and expected contraction in global outlook would weigh heavily on the growth outlook. “The actual out turn would depend upon the speed with which the outbreak is contained and economic activity returns to normalcy,” it said.
The central bank said the coronavirus would impact economic activity in India directly due to lockdowns and through second round effects operating through global trade and growth. However, it expressed hope that recent monetary and fiscal measures would mitigate the impact of COVID-19 on domestic demand and spur growth once the normalcy is restored.
The report also said the impact of COVID-19 on inflation is ambiguous, with a possible decline in food prices likely to be offset by potential cost-push increases in prices of non-food items due to supply disruptions.
The report mentioned that prior to the outbreak of the virus, the outlook for growth for 2020-21 was looking up. The RBI stated that the bumper rabi harvest and higher food prices during 2019-20 provided conducive conditions for the strengthening of rural demand, the transmission of past reductions in the policy rate to bank lending rates has been improving, and reductions in the tax rates and measures to boost rural and infrastructure spending were directed at boosting domestic demand more generally.
“The COVID-19 pandemic has drastically altered this outlook,” it said, adding that the global economy is expected to slump into recession this year, as post-COVID-19 projections indicate.
The RBI further said the sharp reduction in international crude oil prices, if sustained, could improve the country’s terms of trade, but the gain from this channel is not expected to offset the drag from the shutdown and loss of external demand.
The report did not provide any growth forecast for GDP, stating that the situation is highly fluid and incoming data produce shifts in the outlook for growth on a daily basis.
The global macroeconomic outlook is overcast with the COVID-19 pandemic, with massive dislocations in global production, supply chains, trade and tourism, it said, adding the financial markets across the world are experiencing extreme volatility; global commodity prices, especially of crude oil, have declined sharply.
(With PTI inputs)
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