Recovery In Domestic Economic Activity Turning Increasingly Broad Based According To RBI Minutes

The minutes of RBI's last Monetary Policy Committee (MPC) meeting showed that the domestic recovery is gaining traction, but activity is just about catching up with pre-pandemic levels and will have to be assiduously nurtured by conducive policy settings till it takes root and becomes self-sustaining. In particular, private investment has to lead the revival of the economy, along with the strong impetus being provided by exports. Private consumption, despite strong recovery in Q2:2021-22, remains below its pre-pandemic level and demand for contact-intensive services could potentially face headwinds if authorities take pre-emptive steps to contain the fallout of Omicron. Downside risks remain significant rendering the outlook highly uncertain, especially on account of global spillovers, the potential resurgence in COVID-19 infections with new mutations, persisting shortages and bottlenecks and the widening divergences in policy actions and stances across the world as inflationary pressures persist. A tightening of global financial conditions poses risks to global economic activity and to India's prospects as well.

The minutes noted that the recovery in domestic economic activity is turning increasingly broad-based, with the expanding vaccination coverage, slump in fresh COVID-19 cases and rapid normalisation of mobility. Rural demand is expected to remain resilient. The spurt in contact-intensive activities and pent-up demand will continue to bolster urban demand. The government's infrastructure push, the widening of the performance-linked incentive scheme, structural reforms, recovering capacity utilisation and benign liquidity and financial conditions provide conducive conditions for private investment demand. The Reserve Bank's surveys point to improving business outlook and consumer confidence. On the other hand, volatile commodity prices, persisting global supply disruptions, new mutations of the virus and financial market volatility pose downside risks to the outlook.

The RBI Governor Shaktikanta Das highlighted the need to remain vigilant to incipient cost-push pressures to inflation as well as to the uncertainty imparted by Omicron. Its implication for inflation, going forward, are two-fold. First, increase in restrictions, if any, on activity and commerce to stymie COVID-19 spread could translate to continuing supply chain and logistics disruptions. Second, if the Omicron variant results in the onset of new waves of infection globally, this could derail the ongoing demand recovery, he opined.

Powered by Capital Market - Live News