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Monetary Policy At This Stage Has To Provide Adequate Support To Ensure Robust Revival Of Economy Noted RBI Governor

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The Reserve Bank Governor Shaktikanta Das noted in the latest monetary policy meeting that after the sharpest contraction in economic activity in Q1:2020-21, a number of high frequency indicators of economic activity for Q2:2020-21 indicate a sequential improvement. The recovery in all likelihood would be led by rural demand. In urban areas too, there are indications of an uptick in consumption demand with passenger vehicles emerging out of contraction in August, rebound in GST e-way bills to pre-pandemic levels, sequential improvement in GST revenues in September and a steady improvement in PMI manufacturing and services.

Accordingly, the recovery is expected to be multi-speed depending on sectoral realities. Forward looking surveys conducted by the Reserve Bank are also indicating a sequential firming up of the recovery. Households expect an improvement in general economic situation, employment and income over a one year ahead horizon. Capacity utilisation saw some improvement in Q2:2020-21 and a further pick-up is expected from Q3 onwards. Manufacturers expect expansion in production volumes and new orders to continue through Q1:2021-22. Business Expectation Index (BEI) also suggests a move to expansion zone in Q3:2020-21.

However, the RBI Governor noted that downside uncertainties that could put sand in the wheels of this nascent recovery. Primary among them is the risk of a second wave of COVID-19. Private investment activity is likely to be subdued, even as domestic financial conditions have eased significantly. External demand is expected to remain anaemic with sharp contraction in global economic activity and trade.

Monetary policy works through financial markets which serve as the conduit of transmitting policy signals to the real economy. Monetary policy at this stage has to provide adequate support to ensure a robust revival of the economy from the devastating effects of COVID-19, while at the same time ensuring that any persistence of elevated inflation does not lead to unanchoring of inflation expectations, he stated.

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(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

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First Published: Mon, October 26 2020. 12:31 IST
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