RBI Policy Minutes Indicate Economic Recovery Normalizing, Core Inflation Elevated

According to the latest monetary policy minutes of the Reserve Bank Of India (RBI), the RBI Governor Shaktikanta Das noted that the high frequency indicators suggest that the economic recovery is normalising fast in both rural and urban areas. The agricultural sector has been resilient throughout the pandemic and its prospects appear bright in view of higher rabi sowing and comparatively better reservoir levels. Manufacturing activity is picking up. Although initial revival was propelled by pent-up demand, indications are that growth impulses are now being driven by pick-up in activity across manufacturing and services. Forward looking surveys conducted by the Reserve Bank signal greater optimism from manufacturing with the expectation of an expansion in production volumes and new orders in Q4:2020-21 and the following two quarters. The purchasing managers' index for manufacturing is in expansionary zone and was above its long-period average in January 2021.

Consumer Price inflation excluding food and fuel remained elevated at 5.5% in December, due to inflationary impact of rising crude oil prices and high indirect tax rates on petrol and diesel, and pick-up in inflation of key goods and services, particularly in transport and health categories. Proactive supply side measures, particularly in enabling a calibrated unwinding of high indirect taxes on petrol and diesel - in a coordinated manner by centre and states - are critical to contain further build-up of cost-pressures in the economy. Domestic financial conditions continued to remain accommodative to help nurture the recovery. The liquidity provision of Rs 12.9 lakh crore (comprising 6.3% of nominal GDP of 2019-20) since February 6, 2020 has kept systemic liquidity in surplus mode with average daily net absorptions under the liquidity adjustment facility (LAF) at around Rs 5.9-6.0 lakh crore in December-January.

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