Business Today

Big upset for RBI! Second Covid-19 wave to disrupt GDP, inflation projection

The RBI had said two months ago that urban demand and demand for contact-intensive services are expected to strengthen with the substantial fall in COVID-19 cases but things have changed since then. Here's what the central bank will have to factor in while announcing GDP and inflation projections

twitter-logoAnand Adhikari | April 6, 2021 | Updated 19:08 IST
Big upset for RBI! Second Covid-19 wave to disrupt GDP, inflation projection
There is now a downward bias to RBI's GDP projections for the current fiscal year

The six-member monetary policy committee (MPC) is expected to keep the repo rate unchanged at 4 per cent tomorrow while continuing with the accommodative stance to support economic recovery as well as government's borrowing plan. But the Reserve Bank of India (RBI) may have to factor the second Covid wave in its projections for growth and inflation.

Two months ago, the RBI was upbeat on a faster economic recovery and easing of inflationary pressure. The RBI had then said that urban demand and demand for contact-intensive services is expected to strengthen with the substantial fall in COVID-19 cases and the spread of vaccination. Similarly, with a larger-than-anticipated deflation in vegetable prices in December bringing down headline closer to the target, the Central Bank was banking on lower food inflation trajectory to shape the near-term inflation outlook. But things have changed dramatically since the last bi-monthly policy announcement. Let's look at the challenges to RBI's growth and inflation estimates for 2021-22.

There is now a downward bias to RBI's GDP projections for the current fiscal year. The RBI has projected a real GDP of 26.2 per cent to 8.3 per cent in the first half (April-September) of 2021-22. The third quarter (Oct-Dec) GDP was projected at 6 per cent with the entire fiscal year at 10.5 per cent.

Also read: Inflation uncomfortably high in India, says Moody's Analytics

The second wave of Covid cases, however, are likely to throw a spanner in the recovery path. India has already crossed the daily infection figures of 1 lakh cases as compared to the earlier peak of 98,000 in mid September last year. There are over half a dozen states like Maharashtra, Karnataka and Punjab, which are bringing bulk of the cases. Services sector is a major contributor to country's GDP, accounting for 55 per cent of the gross value added.

But the Covid's second wave and the partial lockdown in the country's financial capital Mumbai and other cities have dashed hopes of a faster recovery in sectors like  hotels, tours and tourism, malls, theatres, restaurants , etc.  Domestic rating agency CARE Ltd. has estimated  that the Maharashtra lockdown to shave off 0.30 per cent from the growth. The situation is currently fluid as other states will also go for a partial lockdown. Take for instance, a day after Maharashtra, Delhi has also announced a night curfew.

Also read: Just 62 days! Covid wave II is fast & furious

The RBI's inflation projection has also come under risk. The RBI had projected a retail inflation of consumer price index (CPI) of 5.2 to 5 per cent in the first half (August to September) of 2021-22. The third quarter projection is at 4.3 per cent. The RBI was projecting a lower food inflation, which has a large share in the CPI basket, but the inflation numbers have surprised the market.

The supply side issues post the second wave will also impact the core inflation which has been very sticky in the past few months. The retail inflation or consumer price index (CPI) is currently at 5.03 per cent for  February, which is more than the  RBI 's mandated 4 per cent with a tolerance of  2 to 6  per cent. The government has also decided to continue with 4 per cent inflation targeting for the next five years. The wholesale inflation index (WPI) has also doubled from 2.26 per cent in January to 4.17 per cent in February. The impact of WPI  will get reflected in CPI  with a lag effect.

Also read: Covid-19 second wave: India Inc. optimistic, but spike in cases big concern

The sudden rise in crude prices is also contributing to inflationary pressure. In the last six months, crude oil prices have jumped from $40 a barrel to a high $70 per barrel. The prices are currently hovering around $65 a barrel. Global investment banking firm Goldman Sachs has predicted crude prices crossing $80 a barrel mark by the end of this year.The OPEC (Organisation of the oil exporting countries) is also moving cautiously in increasing the oil production on account of rising Covid-19 cases and delayed recovery.

Also read: Covid-19 curbs in Maharashtra: 'What does essential even mean,' asks Anmol Ambani

Also read: Second COVID wave to be less fatal; surge dispersing among states: CRISIL

  • Print
A    A   A