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Economy gaining traction with pick-up in manufacturing activity

Inflation plateaued in June, albeit at elevated levels outside the tolerance band, and the economy weakened by two waves of the pandemic

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The economy is gaining traction with gradual pick up in manufacturing activity and moderation in the contraction of services, spurred by comfortable liquidity conditions, a Reserve Bank (RBI) article on 17 August said.

Observing that the retreat of the second wave of coronavirus pandemic has been slow, the RBI in an article on the ‘State of Economy’ said that the aggregate demand conditions were buoyed by the release of pent-up demand post-unlock while the supply situation was improving with the monsoon catching up to its normal levels and sowing activity gaining pace.

“Reaffirming the traction that the economy is gaining, the manufacturing activity is gradually turning around, while the contraction in services has moderated. Spurred by comfortable liquidity conditions, financial conditions stay benign and supportive of the recovery,” it said.

The article notes that with the cautious unwinding of restrictions by states, human mobility has risen to levels last seen in February 2021, prior to the onset of the second wave. Electricity generation readings, too, have recovered to peak levels seen in April 2021 and are closing on to the pre-pandemic level (July 2019).

It has been authored by a team led by RBI Deputy Governor Michael Debabrata Patra. The central bank said that the views expressed in the article were those of the authors and did not necessarily represent the views of the RBI.

E-way bill collections rose to their highest level in the last four months, clocking a growth of 17.3% sequentially over June 2021.

Normalised to February 2020 levels, E-way bills, both intra-state and interstate, surpassed pre-pandemic levels. In August so far (up to 8 August), daily average E-way bills declined sequentially by 5.8%, with implications for GST collections going forward.

Also, toll collections rebounded in July, nearing the March 2021 record when Fastag was made mandatory.

As per the article, fuel consumption recorded an uptick in July 2021. While the consumption of petrol reached pre-pandemic levels and aviation turbine fuel (ATF) recorded a sequential improvement, diesel consumption slipped marginally.

On the price rise front, the article said the headline CPI inflation for July 2021 had come in at 5.6%, down 70 bps from 6.3% a month ago, “reinforcing the view that the recent upsurge has peaked and the worst would be behind us”.

Further, high-frequency food price data from the Department of Consumer Affairs indicate an uptick in cereal prices in August so far. Prices of pulses, on the other hand, continue to soften. Edible oil prices are seeing some pressure.

Among key vegetables, prices of potatoes, onions and tomatoes saw some seasonal increase in prices, it said.

On the recent enactment of amendments to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, the article said it was a major step towards ameliorating depositor distress.

“Henceforth, when a bank faces stress, its depositors will be able to get back their deposits up to Rs 5 lakh within 90 days. This is a significant change. It enhances the mandate of the DICGC from a limited pay-box function to a pay-box plus one which will boost public confidence in the banking system. This augurs well for consumer protection and overall financial stability,” it said.

On central bank digital currency (CBDC), a fiat liability denominated in the national unit of account that is digitally issued and accessible to all economic agents, the article said “there is a quiet confidence within that its time is nigh”.

The authors said the CBDC might not directly replace demand deposits held in banks and would complement physical cash. It will compete with other online and offline payment methods and thereby support a more resilient and diverse payment system while shunning the risks associated with private digital currencies.

The Reserve Bank is conscious that the CBDC has to be meticulously planned, designed and tested, they said.

“Going forward, CBDCs could form the backbone of a highly efficient new digital payment system, enabling broad access and providing strong data governance and privacy standards, and safeguarding the payment system against illicit activities”.

Referring to the recent meeting of the RBI’s rate-setting panel, the article said it was “arguably a challenging meeting of the monetary policy committee (MPC) held during August 4-6, 2021”.

Against the backdrop of inflation plateauing in June, albeit at elevated levels outside the tolerance band and the economy weakened by two waves of the pandemic, the MPC voted unanimously to keep the policy interest rate unchanged and by a 5/1 majority to maintain the accommodative stance it articulated in its previous meeting.

“It was perhaps the most widely anticipated MPC meeting outcome and yet, some dust was stirred and some misgivings,” it said.

So far, inflation is on track to stay within the trajectory envisaged and it is likely to stabilise during the rest of the year, the article said. “In our view, this is a credible forward-looking mission statement for the path of inflation,” it added.

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