Covid-19 to accentuate growth slowdown, impact on inflation ambiguous: RBI

Mumbai/New Delhi: The Reserve Bank of India (RBI) on Thursday said while the pandemic coronavirus would impact the economic activity directly and would accentuate the growth slowdown, its impact on inflation is ambiguous.

“While efforts are being mounted on a war footing to arrest its spread, COVID-19 would impact economic activity in India directly through domestic lockdown. Second round effects would operate through a severe slowdown in global trade and growth,” the RBI said in a report.

The central bank said there was an immediate impact in terms of spillovers being transmitted through finance and confidence channels to domestic financial markets.

“These effects and their interactions would inevitably accentuate the growth slowdown, which started in Q1:2018-19 and continued through H2:2019-20,” the RBI added.

Meanwhile, headline inflation stayed above the upper tolerance band of the inflation target during December 2019-February 2020, led by a spike in vegetable prices.

“While inflation has peaked and vegetable prices are on the ebb, the impact of COVID-19 on inflation is ambiguous relative to that on growth, with a possible decline in prices of food items being offset by potential cost-push increases in prices of non-food items due to supply disruptions,” the central bank added.

The National Statistical office would face considerable challenges in compilation and measurement of consumer prices due to the nationwide lockdown, the RBI said. “Since March 2020, the inflation outlook has become highly uncertain due to the COVID19 outbreak turning into a pandemic. Crude oil prices have collapsed to lows not seen since early 2000s,” it added.

The Reserve Bank added that the demand conditions may weaken sharply as several major economies are in the lockdown mode.

"Accordingly, countries across the world are bracing up for deflationary forces to take hold. India may not be immune to these extreme downside pressures imparted by the pandemic."

The RBI said prior to the outbreak of COVID-19, the outlook for growth for FY21 was looking up, but now that has been altered.

“COVID-19, the accompanying lockdowns and the expected contraction in global output in 2020 weigh heavily on the growth outlook,” the central bank said.

The actual outturn would depend upon the speed with which the outbreak is contained and the economic activity returns to normalcy, it said adding that significant monetary and liquidity measures taken by the Reserve Bank and fiscal measures by the government would mitigate the adverse impact on domestic demand and help spur economic activity once normalcy is restored.

“Risks around the inflation projections appear balanced at this juncture and the tentative outlook is benign relative to recent history. But COVID-19 hangs over the future, like a spectre,” the central bank said.