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Omicron a ‘flash flood than a wave’; demand resilient: RBI

Mobility indicators exhibited a sequential moderation in January. Google mobility indices dropped below the baseline numbers for retail and recreation activities and around workplaces as offices made a quick transition to work from home protocols (up to January 8, 2022).

By: ENS Economic Bureau | Mumbai |
January 18, 2022 3:00:03 am
According to the central bank, as the world stepped into the new year, the path of the recovery in India as in the rest of the global economy encountered headwinds from a rapid surge in infections due to Omicron.

While the recovery that has been underway in the Indian economy is encountering headwinds from a rapid surge in Covid cases in a third wave marked by the rapid transmissibility of the Omicron variant, expectations that the variant may turn out to be more of a “flash flood than a wave” have brightened near-term prospects, the RBI has said.

Mobility indicators exhibited a sequential moderation in January. Google mobility indices dropped below the baseline numbers for retail and recreation activities and around workplaces as offices made a quick transition to work from home protocols (up to January 8, 2022). The Apple mobility index tumbled across all major cities, although it remained above its pre-pandemic level. Electricity generation accelerated through January so far, reaching pre-pandemic levels, the RBI said in its ‘State of the economy’ report.

According to the central bank, as the world stepped into the new year, the path of the recovery in India as in the rest of the global economy encountered headwinds from a rapid surge in infections due to Omicron. “Nonetheless, amidst upbeat consumer and business confidence and an uptick in bank credit, aggregate demand conditions stay resilient, while on the supply front, rabi sowing has exceeded last year’s level and the normal acreage,” the RBI said.

Explained

The RBI report noted that there are indications that supply chain disruptions and shipping costs are slowly easing, although the waning of inflation may take longer, which will be keenly tracked.

Manufacturing and several categories of services remain in expansion, it said. “Overall economic activity in India remains strong, with upbeat consumer and business confidence and upticks in several incoming high frequency indicators,” the RBI said. On the vaccination front, India has made rapid strides. On the Omicron variant, the recent data from the UK and South Africa suggest that such infections are 66 to 80 per cent less severe, with a lower need for hospitalisation, it said. The RBI said this has brightened near-term prospects and financial markets reflect this optimism. India’s digital payment ecosystem is also expanding rapidly. In contrast, the global outlook remains clouded by considerable uncertainty. “Inflation continues to mount across geographies amidst disruptions in production, supply chains and transportation,” the report said.

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Consequently, the divergence between monetary policy stances across jurisdictions has widened, the RBI said. There are indications that supply chain disruptions and shipping costs are slowly easing, although the waning of inflation may take longer. This provides a window of opportunity to focus all energies on accelerating and broadening the global recovery, it said.

Meanwhile, an RBI article on farm sector challenges said, as per a PTI report, said the country needs a second green revolution along with the next generation of reforms to make agriculture more environmentally sustainable.

‘Covid hit consumer confidence’

Mumbai: The Covid pandemic severely dented consumer confidence in India, which reached historic lows as the repercussions of the wave unfolded, the RBI said in a study.

“Sentiments of households across strata were influenced by the spread of infections and fatalities. There was enduring impact on consumers’ sentiments on their own financial conditions as well as the general economic situation – with the latter increasingly driven by the former,” the RBI study said.

It said consumers in cities severely hit by the pandemic expressed more negative sentiment as compared to respondents in the other cities. Respondents’ expectations for the year ahead showed faith in economic recovery after subsidence of the pandemic, it said.

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