The spillovers are being transmitted through finance and confidence channels to domestic financial markets more immediately.
India’s nationwide lockdown has put the businesses and industries on a standstill but there are many other factors that are expected to hit the nation’s overall economic growth. The global economy is poised to go into recession in 2020 and thus a major slowdown may come as a headwind. “Second round effects would operate through a severe slowdown in global trade and growth,” RBI said in its April’s Monetary Policy Report. It also said that the spillovers are being transmitted through finance and confidence channels to domestic financial markets more immediately. These effects would inevitably accentuate the growth slowdown, which started in Q1 FY19 and continued through H2 FY20, the report added.
While the crude prices are continuously falling, it may give some support to India’s current account as oil is the largest share of the country’s overall imports. However, the price benefit may not be enough to offset the loss caused by coronavirus pandemic, shutdown, and loss of external demand, RBI said in its report.
The disruption caused by lockdown and sealed state borders will not only remain limited to the macro levels but the common people are also expected to bear the brunt of it. Goods may become expensive with their lower availability. The Reserve Bank has still not given the outlook of inflation, calling it ambiguous at the moment. “The impact of COVID-19 on inflation is ambiguous, with a possible decline in food prices likely to be offset by potential cost-push increases in prices of non-food items due to supply disruptions,” said the central bank.
Meanwhile, the financial markets across the world are experiencing extreme volatility, equity markets recorded sharp sell-offs, with volatility touching levels seen during the global financial crisis, flights to safety have taken down sovereign bond yields to record lows, risk spreads have widened, and the financial conditions have tightened.