June 18, 2021

Indian & World Live Breaking News Coverage And Updates

Indian & World Live Breaking News Coverage And Updates

Resurgence of pandemic may bring back inflation pressure, says RBI

Resurgence of pandemic may bring back inflation pressure, says RBI

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The of India (RBI) on Monday warned that the resurgence of the pandemic could bring back inflationary pressures in the country.

“The resurgence in Covid-19, if not contained in time, risks protracted restrictions and disruptions in supply chains with consequent inflationary pressures,” the said in its state of the economy report, a part of the bulletin for April.

“Pandemic protocols, speedier vaccination, ramping up hospital and ancillary capacity, and remaining resolutely focused on a post pandemic future of strong and sustainable growth with macroeconomic and financial stability is the way forward,” the report said.

Vaccine coverage has been progressing at a glacial and unequal pace in the world. Specifically for India, the vaccination target of 300 million by end-August will require an average of 3.5 million shots per day, about 13 per cent higher than the current pace, it noted.

However, the government has now decided to inoculate all above 18 and monsoon is expected to be good. This should augur well for the economy going forward, the said.

The has stepped off into hitherto uncharted terrain with its G-Sec acquisition programme, or G-SAP, as it committed upfront for the first time to the acquisition of a specified amount of government securities in a specified period of time. The RBI will buy Rs 1 trillion of bonds from the secondary market in the June quarter under this programme and there will be more purchases in the quarters to come.

The programme is not monetisation of deficit, the RBI said, but it is different from open market operations in that the RBI “cedes discretion in the interest of supporting the market; it delivers on the RBI’s promise of sustaining comfortable liquidity conditions in a flexible, state-contingent manner regardless of market movements; it helps market participants plan their engagement with the borrowing programme better.”

Nevertheless, there are risks of asset bubbles, currency depreciation and capital flight associated with it, “but the balance of risks lies in favour of G-SAP 1.0 engendering congenial prospects for financial conditions and paving the way for a durable economic recovery.”

The G-SAP will fix the “unwinding of trade positions caught offside and out of line with fundamentals,” the RBI hoped.

At the same time, the central bank suggested it was in no hurry to withdraw stimulus too soon. The is less sensitive to demand pressures than once feared, and the central banks will lean towards growth in pandemic times, as is still only catching up.

“But when markets cannot keep the faith and take the inverse bet – that monetary policy cannot stay loose for long – they are frontrunning the economy,” it said, putting the onus on the markets on monetary policy tightening by pushing up yields anticipating monetary policy tightening.

The RBI’s report claimed that the economic activity in India is holding up “admirably against Covid-19’s renewed onslaught.”

“Much attention has been drawn to the wilting of incoming data in the face of the second wave and localised restrictions. Yet, it is important to note that it is the sentiment indicators that have moderated. Apart from contact-intensive sectors, activity indicators largely remained resilient in March and grew beyond pre-pandemic levels on the back of strong momentum rather than statistical base effects,” it said.

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