The second wave of COVID-19 has hit India hard with infections as well as mortalities hitting a peak in May. Many states imposed lockdowns of varying degrees, which has had a huge impact across sectors, especially those that are contact-intensive. In this backdrop, the Reserve Bank of India has gone all out with a focus on economic growth, even as it flagged inflationary concerns rising from global commodity price increases.
The monetary policy committee of the RBI unanimously left the benchmark repo rate unchanged at 4 per cent. The MPC also decided to continue with the “accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring inflation remains within the target going forward.”
Data released by the government’s statistics office earlier this week showed that India’s economy grew for the second quarter in a row. The January-March quarter GDP grew 1.6 per cent, although for the full year ended March 31, 2021 it still shrank 7.3 per cent. Other economic data too has been mixed.
Mining and electricity output, for instance, surpassed pre-pandemic levels in March. The output of core industries also registered double-digit growth in April. However, GST collections, which hit a high in April, are likely to moderate in May due to lockdowns in various states. Other, high frequency indicators like railway freight traffic, port cargo, steel consumption, cement production and toll collections also saw a sequential moderation over April-May.
So, reviving growth gains prominence even as inflation concerns have risen.
“The MPC was of the view that at this juncture policy support from all sides is required to gain the momentum of growth that was evident in the second half of 2020-21 and to nurture the recovery after it has taken root,” said RBI Governor Shaktikanta Das.
Over the last few months, there has been an increase in prices of raw materials from oil to metals and cement, driving varying degrees of price hikes of automobiles to consumer goods. Looking ahead, the RBI sees uncertainties on the upside as well as downside.
The rising trajectory of international commodity prices, especially of crude, together with logistics costs, pose upside risks to the inflation outlook. On the other hand, a normal south-west monsoon along with comfortable buffer stocks should help to keep cereal price pressures in check, it said.
The central bank feels, excise duties, cess and taxes imposed by the Centre and states need to be adjusted in a coordinated manner to contain input cost pressures emanating from petrol and diesel prices.
The RBI has raised its inflation expectations in this wake. It has projected retail inflation at 5.2 per cent in the June quarter, 5.4 per cent in the second quarter (5.2 per cent expected earlier), 4.7 per cent in the third quarter (earlier forecast of 4.4 per cent) and 5.3 per cent in the fourth quarter (earlier expected 5.1 per cent).
On the growth front, a rebound in global trade and improving demand conditions in advanced economies aided by stimulus packages and vaccination drives is expected to boost India’s exports, even as the second wave of COVID had an impact on domestic demand. The RBI has called for targeted measures to drive India’s exports post pandemic.
“India’s exports in March, April and May 2021 have launched into an upswing. Conducive external conditions are forming for a durable recovery beyond pre-pandemic levels. The need of the hour is for enhanced and targeted policy support for exports. It is opportune now to give further policy push by focusing on quality and scalability,” said Das.
In line with several ratings agencies, the RBI, too, has scaled down its GDP growth forecasts. It now sees India’s economy growing at 9.5 per cent in the current financial year ending March 2022, compared to 10.5 per cent it had predicted earlier. GDP growth in the June quarter is forecast at 18.5 per cent on a low-base, sharply lower than the 26.2 per cent it had expected earlier.
In the backdrop of the second COVID wave and the impact it has had on contact-intensive sectors like hotels, restaurants, tourism, aviation ancillary services like supply chain and ground handling and other services like private bus operators, event organisers, car rentals, repair services, beauty parlors and salons, a separate liquidity window of Rs 15,000 crore will be opened till March 31, 2022, with tenors of up to three years at the repo rate.
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By way of an incentive, banks will be permitted to park their surplus liquidity up to the size of the loan book created under this scheme with the Reserve Bank under the reverse repo window at a rate 40 basis points higher than the reverse repo rate.
In order to boost funding support to small and medium enterprises, the RBI plans to extend a special liquidity facility of Rs 16,000 crore to SIDBI (Small Industries Development Bank of India) for on-lending/ refinancing through novel models and structures. This facility will be available at the prevailing policy repo rate for a period of up to one year, which may be further extended depending on its usage.
In the previous monetary policy announcement in April, the RBI had announced G-SAP 1.0 (government securities acquisition programme). Up to May 31, the RBI undertook regular open market operations and injected additional liquidity to the tune of Rs 36,545 crore, in addition to Rs 60,000 crore under G-SAP 1.0. The RBI will conduct another operation under G-SAP 1.0 on June 17 to purchase government securities worth Rs 40,000 crore. It also announced G-SAP 2.0, whereby the central bank will conduct secondary market purchases to the tune of Rs 1.20 lakh crore in the second quarter.
Das hopes that the various measures announced thus far will help the economy regain momentum.
“The sudden rise in COVID-19 infections and fatalities has impaired the nascent recovery that was underway, but has not snuffed it out. The impulses of growth are still alive. We will continue to think and act out of the box, planning for the worst and hoping for the best,” he said.