India’s Economic Growth Won't be Derailed by Second Wave

India’s Economic Growth Won’t be Derailed by Second Wave of COVID 19: RBI Governor Shaktikant Das

Two months ago, no one could have predicted that April would be the worst month of 2021 with an increasing number of COVID 19 infections among patients. The second wave of Covid 19 seems to be very fierce as it has already started slowing down the economic growth of the country while the inflation rate remains high.

Amid this uncertainty, Reserve Bank of India governor Shaktikanta Das on Thursday gave a positive statement regarding the economic activities held in the country.

He confidently said that the new wave of COVID 19 would not derail the economic journey. He maintained the RBI’s recent 10.5 percent growth forecast for the upcoming fiscal year (FY 2022). In other words, RBI Governor Shaktikanta Das has come up with an exclusive idea of keeping liquidity sufficient enough to rein in yield, preventing the currency from appreciating and inflation from going upside.

The governor’s assurance assumes significance amid apprehension about surging new COVID cases and resultant lockdown being clamped in many cities.

Many states along with the COVID hotspot state of India – Maharashtra that has marked a huge number of cases more than 50,000; are seeing a massive surge in pandemic infections, irritating the equity and bond market.

The worry is that most of these infections are caused by the strain that came this year but not the initial COVID 19 that killed over 1.5 lakh people in the country.

It may be noted that the RBI governor has given a 10.5% growth for FY 22 and the governor firmly believes that never sees a downward revision in 10.5% growth. He also does not believe that the complete lockdown will be held this year which the country witnessed last year.

When the developed markets are unleashing large fiscal stimuli, U.S. treasury yields are rising and commodity prices are going down.

The inflation rate for the Feb month was around 5 %, however, the core inflation rate in January was at 6%. Now, some economists say, there is a chance that the inflation rate could oscillate between 5.5% to 6%.

Fortunately, some helpful base effects are expected to hold down food prices.

Growth: A New Concern

The Indian economy somehow returned to its original track i.e growth in the last quarter of the year 2020 and is expected to surge again by the end of March. However, with the rising Covid 19 infections, the sequential growth may drop thereafter.

As the cases are rising with strict state-wise restrictions, the country expects soft, steady growth in Q1 FY 22, financial experts said in one of her reports.

RBI clearly monitors the growth factor of the Indian economy, keeping the inflation rate in mind. According to Madhavi Arora, an economist at Emkay Global, RBI leaves no stone unturned in maintaining FY 22 growth.

Rising Inflation Can’t Be Ignored

Rising Covid infections lead to high inflation that even MPC will not be able to ignore the inflation effect. Retail inflation rose to 5.03% which is a three month high in February as food prices saw a modern bounce back. According to the MPC said in its last meeting, fundamental requirements such as food, fuel all have risen.

Maintaining retail inflation at 4% with a margin of 2% is a quite challenging task, especially in the current circumstances, said Govinda Rao, chief economic advisor at Brickwork ratings.

As the inflation rate is still moving upward, excess liquidity and volatility in crude oil prices could lead to upward risk, Rao further said. Once the current output gap narrows, surplus liquidity conditions could put pressure on prices, and the RBI will have to be vigilant.

Liquidity: Excesses to Continue

At the last of the last MPC, RBI had decided to restore CRR (cash reserve ratio) in two phases. However, Governor Shaktikanta Das had assured to maintain the market liquidity despite restoring a huge amount of CRR. Also, he mentioned that a reversal of CRR cut will be given to central bank space to conduct larger bond purchases.

Rao further said, the RBI may likely drain excess liquidity. But given the higher government borrowings, which may put pressure on bond yields, the RBI may go slow in reversing its liquidity measures.

The RBI also all set to announce its first monetary policy in the first week of April. Also, high government borrowings at record high leads to soaring yields. Shaktikanta Das said, there is no fight between the central bank and the bond market.

The governor further assured, the RBI will ensure the bond purchases are of equal quantum. The RBI’s foreign exchange reserves are all its requirements.

The government took a new decision to privatize the state-run bank, he said the central bank is in continuous discussions with the RBI on the same. The centre always took into consideration the viewpoint of the regulator on such issues, he said.

Also, RBI is working on a central bank digital currency (CBDC). RBI’s stance on cryptocurrency has revealed that it will bring a new bill on cryptocurrencies.

It has been noticed that there are few practical operationalizations of CBDC which makes RBI more responsible while launching a safe and robust model. RBI further said that the UPI can act as the best medium for providing the best yet fast services for cross border payments.

Adding to this, Shaktikanta Das, further said the day is not too far when we (India) will experience cheaper, safer and faster cross border remittances, adding Rupay card which in future, will make a mark in the global financial landscape.

Bottom Line

Needless to say, the second wave of infections badly threatens the economy which in turn increases inflation to a greater extent. Growth is clearly losing its momentum as many sectors fail to generate revenue in the upcoming months.

At this point in time where the second wave of COVID ruins almost everything, many investors are trying to save their money for future perspective. Therefore, many investors are seeking the best investment advisory services which help them to grow business financially.

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