Changing Outlook: Lower oil prices cannot cushion Covid-19 shock, says RBI

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Published: April 10, 2020 4:20:04 AM

On the whole, apart from the continuing resilience of agriculture and allied activities, other sectors of the economy will be adversely impacted by the pandemic, depending upon its intensity, spread and duration, the report said.

The central bank observed that while efforts were being mounted on a war footing to arrest its spread, Covid-19 would impact economic activity in India directly through the lockdown.The central bank observed that while efforts were being mounted on a war footing to arrest its spread, Covid-19 would impact economic activity in India directly through the lockdown.

The terms-of-trade gains accruing to India as a result of falling crude oil prices may be insufficient to cushion the shock that the Covid-19 pandemic will inflict upon growth, the Reserve Bank of India (RBI) said on Thursday. “The sharp reduction in international crude oil prices, if sustained, could improve the country’s terms of trade, but the gain from this channel is not expected to offset the drag from the shutdown and loss of external demand,” the central bank observed.

The central bank observed that while efforts were being mounted on a war footing to arrest its spread, Covid-19 would impact economic activity in India directly through the lockdown. “Second round effects would operate through a severe slowdown in global trade and growth. More immediately, spillovers are being transmitted through finance and confidence channels to domestic financial markets. These effects and their interactions would inevitably accentuate the growth slowdown, which started in Q1:2018-19 and continued through H2:2019-20,” the RBI said in its monetary policy report for April 2020.

The report observed that prior to the outbreak of the pandemic, the outlook for growth was looking up, with a bumper rabi harvest, transmission of past rate cuts and reductions in tax rates offering support. All that has changed after the outbreak as the global economy is now staring at a recession. However, responses received to a survey on business sentiment, held before the nationwide lockdown was effected on March 25, suggested the outlook for key demand indicators in Q1FY21 has significantly worsened.

On the whole, apart from the continuing resilience of agriculture and allied activities, other sectors of the economy will be adversely impacted by the pandemic, depending upon its intensity, spread and duration, the report said. “Relatively modest upsides are expected to emanate from monetary, fiscal and other policy measures and the early containment of Covod-19, if that occurs. Such uncertainties make the forecasting of inflation and growth highly challenging,” it added. The key factors to be watched in order to gauge the future macroeconomic trajectory are the exchange rate, crude prices and domestic food prices.

The trajectory for inflation, while difficult to gauge precisely, is likely to remain benign in the months ahead, the report noted. The forward-looking surveys also hint at inflation remaining subdued in Q1FY21. The two forces driving this would be lower food prices resulting from increased production and the collapse in crude prices. However, the RBI qualified this view, saying that all these signals are “heavily conditioned by the depth, spread and duration of Covid-19”. Shifts in any of these characteristics of the pandemic could result in drastic changes in the outlook.

In view of the disruption caused by the spread of the pandemic, the monetary policy committee (MPC) had met pre-emptively last month, after which the RBI announced a 75-basis point (bps) cut in the repo rate on March 27, as well as a raft of other measures to support the economy. At the same time, the MPC had chosen not to make any projections for growth or inflation, citing the uncertainty arising out of the spread of Covid-19.

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