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Wednesday, July 28, 2021

RBI: Second wave hit domestic demand, but agri, contactless services holding up

The central bank has slashed the GDP growth to 9.5 per cent in FY22 after the 7.3 per cent contraction in FY21.

By: ENS Economic Bureau | Mumbai |
June 17, 2021 3:17:09 am
The revised instructions should be applicable to all the banks and they should comply with these instructions within six months from the date of issue of the RBI circular, the central bank said.

The Reserve Bank of India (RBI) has said that the speed and scale of vaccination will determine the economic recovery in the country hit by the Covid-19 pandemic.

The economy has the resilience and the fundamentals to bounce back from the pandemic and unshackle itself from pre-existing cyclical and structural hindrances, it said. “Going forward, the speed and scale of vaccination will shape the path of recovery,” the central bank said. “Signs of the ebbing of the second wave of the pandemic are cautiously becoming evident,” the RBI said in its ‘State of the Economy’ report.

It stated the economy continues to wrestle with the second wave of the pandemic, though cautious optimism is returning. “By current assessment, the second wave’s toll is mainly in terms of the hit to domestic demand. On the brighter side, several aspects of aggregate supply conditions – agriculture and contactless services are holding up, while industrial production and exports have surged amidst pandemic protocols,” the central bank said.

The central bank has slashed the GDP growth to 9.5 per cent in FY22 after the 7.3 per cent contraction in FY21.

In fact, the data suggest that the second wave is rolling back almost as fast as it rolled in, it said. On June 14, the daily cases fell to a seventh of their peak of 4,14,188 a month ago (May 6). The seven-day average, which smooths out daily fluctuations, also declined by a fifth from its peak of close to 4 lakh. This is also reflected in the doubling rate, which increased to 247 days from its trough of 34 days at the end of April.

The daily positivity rate, which had peaked at 22.7 per cent in early May, plummeted to 3.8 per cent, remaining below 10 per cent for the 14th consecutive day, and dipping even lower than the first wave’s peak of 11.7 per cent at end-August 2020.

“This fortuitous configuration also prevails in 7 of the 12 states that had led the national infections trajectory at the outbreak of the second wave,” it said. “Fatalities are undergoing revisions as states improve their reporting, but the slow pace of their reduction relative to infection is keeping the nation on edge,” the report added.

In May, CPI inflation printed at 6.3 per cent, registering an increase of 2.1 percentage points over 4.2 per cent in April.

While the surge in inflation may have a lot to do with pandemic base effects, it is also fuelled by years of underinvestment having made the supply response less dynamic, exacerbated by supply chain bottlenecks, the RBI said. “In this situation, monetary policy is hostage to its own stance and loose financial conditions that it creates will cause excessive risk taking in markets even as inflation migrates upwards,” it said.

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