By Shanti Ekambaram
A revival in the consumption cycle after Covid 2.0, led by latent demand and surplus liquidity in the system, fuelled growth in the economy back to pre-pandemic levels in the July-September quarter. Higher crude prices, supply chain issues and agri produce prices resulted in higher inflation and core inflation remained sticky.
The central bank had started liquidity normalisation that saw the yield curve rising. It was widely expected there would be some policy measure on moving the reverse repo rate in the December policy.
However, the new Omicron variant has caught everyone unawares and the scare of the new variant looms large. We are as yet unclear about Omicron’s intensity, but it definitely could push back the return to normalcy if its spread intensifies in the next few weeks.
Growth is real
The GDP for the September quarter stands at 8.4% as compared to the contraction of 7.4% that was witnessed a year ago in Q2 of FY2021. The GDP growth in the September quarter was real and evident across sectors.
Sequential momentum picked up as the economy opened up after the second wave and coincided with the beginning of the festive season. There was a sharp pick-up in services. Consumers have been exercising their purchasing power led by the festive push and attractive offers all around. The rising vaccination levels also raised confidence in consumers.
RBI’s accommodative stance and liquidity push ensured that the long pent-up demand made itself felt in the festive season that began from October. That is how the economy bounced back in the September quarter and in October, did marginally better than the pre-pandemic era.
At the same time, due to supply chain shortages, cost push inflation has been rising. Inflation in wholesale prices was at a five-month high of 12.54% in October, as compared to 10.66% in September. Retail inflation, measured by the consumer price index, was at 4.32% in October as compared to 4.45% in September. While retail inflation seems to have softened in October, core inflation has been sticky.
Turning point in the economy
We are now at an inflection point in the economy. It was widely expected that the RBI would now start unwinding some of the liquidity. We saw some of that in the last month and the resultant movement in the yield curve.
The capital expenditure cycle has started in pockets and is expected to increase. Travel has seen an upsurge, entertainment, malls and restaurants have gradually opened up and consumption demand has been steady.
But Omicron has stoked some amount of uncertainty in the system. There is likely to be a slowdown in travel and some discretionary consumption. The next two-three weeks are critical to understand the intensity and likely impact of Omicron. This could have some impact on the growth trajectory if lockdowns or other such restrictions are imposed.
Given this background, as of now, the MPC will likely keep all the key rates unchanged. They will wait and watch for further data to make any move on rate action. They will continue to balance between economic growth and inflation and will use other tools at their disposal to manage liquidity. It will be important to see the tone and narrative of the policy but action will likely move to the next calendar year.
(The writer is group president – consumer banking, Kotak Mahindra Bank. The views expressed in the article are personal)