Monday 8 March 2021
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Economic revival seeing phoenix-like rise: RBI

The article was accompanied by the usual disclaimer that views expressed are those of the authors and do not necessarily reflect the views of the RBI

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Economy Economic revival seeing phoenix-like rise: RBI

India’s economic recovery is strengthening and policymakers may soon have more room for steps to support the revival, an article published in the Reserve Bank of India’s January bulletin said.

“Recent shifts in the macroeconomic landscape have brightened the outlook, with GDP in striking distance of attaining positive territory and inflation easing closer to the target. If these movements sustain, policy space could open up to further support the recovery,” the article said.

The article was accompanied by the usual disclaimer that views expressed were those of the authors and do not necessarily reflect the views of the RBI.

The central bank cut policy rates by 115 basis points last year to support the recovery but it has left rates unchanged in recent months due to rising inflation.

The article said the number of e-way bills issued in December 2020 was the highest ever, “suggesting that the recovery is no longer aloft on the fleeting tailwinds of festival spending but is rising phoenix-like on the wings of an intrinsic momentum”.

The article noted that in the first half of 2021-22, GDP growth will benefit from statistical support and is likely to be mostly consumption-driven.

“Recent high-frequency indicators suggest that the recovery is getting stronger in its traction and soon, the winter of our discontent will be made glorious summer,” the RBI paper said, quoting William Shakespeare.

The Indian economy shrank 23.9% in the first quarter and 7.5% in the second quarter on account of the covid-19 pandemic. RBI expects the economy to contract by 7.5% in the current fiscal to March.

An early revival in investments will be critical to secure a durable turnaround and sustainable growth. The cash idling in the balance sheets of corporations and banks and reverse repo balances with RBI must find their way into credit to productive sectors and into real spending on investment activity before it imposes a persistent deflationary weight on real activity, it said.

The article reiterated RBI’s stance that the financial sector’s balance sheet could intensify with the expiry of the standstill on asset classification. However, banks this time are better prepared to handle the crisis with stronger capital buffers than the at the time of the global financial crisis.

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