Tepid Bank Credit Growth Suggests Weak Demand Noted RBI Governor

According to the Minutes of the latest Monetary Policy Committee Meeting, the RBI Governor Shaktikanta Das noted that impact of COVID-19 on the domestic economy has turned out to be far more severe than initially anticipated. Lockdowns across major economies have also severely impacted economic activity across the globe. In the April WEO, the IMF projected the global economy to contract sharply by 3.0 per cent in 2020. GDP data for Q1:2020 and more recent high frequency indicators emanating from major advanced and emerging market economies, however, suggest that the contraction in global growth could be even deeper.

Domestic economic activity has been impacted severely by two months of lockdown which was imposed to contain the spread of the COVID-19 pandemic and save human lives. High frequency indicators for March-April 2020 suggest a collapse of demand. Industrial output, measured by the index of industrial production (IIP) for March, which included only seven days of the nation-wide lockdown, contracted by 16.7 per cent. The contraction was spread across sectors, with manufacturing shrinking by 20.6 per cent and capital goods production by 35.6 per cent. Private consumption, which has been the bedrock of domestic demand, also plummeted with the production of consumer durables falling by 33.1 per cent in March 2020 and that of non-durables by 16.2 per cent.

Limited data that are available for April suggest a further shrinkage in demand. India's merchandise trade slumped in April 2020, with exports contracting by 60.3 per cent and imports by 58.6 per cent. While railway freight traffic shrank by 35.3 per cent in April, steel consumption declined by 90.9 per cent. PMI manufacturing and PMI services in April slipped to unprecedented levels of 27.4 and 5.4 respectively. Bank credit growth continues to be tepid, suggesting weak demand. Non-food credit of scheduled commercial banks (SCBs) grew by 6.5 per cent (y-o-y) as on May 8, 2020 as compared with 13.0 per cent a year ago. During 2020-21 so far (up to May 8, 2020), however, banks' investment in commercial paper, shares, bonds and debentures increased by Rs 66,757 crore as against a decline of ₹8,822 crore during the same period last year, reflecting the impact of targeted long term repo operations (TLTROs) of the Reserve Bank.

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