The Reserve Bank of India (RBI) on Monday, March 1, said India's economic activity is gaining momentum on COVID-19 vaccination roll out and decrease in infections, but private investment is missing.
The vaccination programme has released pent-up optimism and "there is little doubt today that a recovery based on a revival of consumption is underway," RBI said.
"All engines of aggregate demand are starting to fire; only private investment is missing in action and the time is apposite for it to come alive. Broader measures of liquidity reflect easing of monetary and financial conditions in the system," the central bank said in its monthly bulletin for February.
India's GDP growth returned to positive territory in October-December after contracting for two consecutive quarters due to the COVID-19 pandemic and related disruptions. As per government data, India's GDP increased 0.4 per cent during the third quarter ended December 31, 2020, as against a 24.4 per cent contraction in April-June and a 7.3 per cent de-growth in July-September.
The RBI expects the Indian economy to grow by 10.5 per cent in the financial year 2021-22.
"In terms of nominal GDP, 96 per cent of prepandemic economic activity has been restored, assuming that the National Statistical Office's first advance estimates hold," the RBI said.
On inflation, it said with production of pulses 6 per cent higher than a year ago, inflationary pressures on the food front are set to ebb, but core inflation will warrant deft and dogged attention.
"While disproportionately high excise duties on petroleum products are hostage to the state of public finances, buoyancy in other heads of revenue could loosen this stranglehold, bring down pump prices of petrol, diesel and of cooking gas to more internationally comparable levels, improve the inflation outlook and expand consumer welfare," the bulletin said.
Fiscal policy authorities have to stimulate the economy while also ensuring sustainable finances. Monetary authorities are encountering a similar dilemma of conflicting pulls - ensuring an orderly evolution of the interest rate structure in the face of still enlarged borrowing needs against the need to remain accommodative and support the recovery, it said.
"While policy authorities exhibit resoluteness in their commitment, markets are assailed by uncertainty and sporadic shifts between hunts for returns and flights to safety. A shared understanding and common expectations will likely be the anchor in this turbulence," RBI said, adding that markets will have to rely on the track record of authorities during the most "trying year in a century."
"A vibrant and self-sustaining economy will lift all boats and markets can do no better than support policy authorities as they struggle to regain that stride," it said.