Even as mobility has slowed, recovery is close to pre-pandemic levels, weighing on core inflation; RBI will be watchful
We believe that activity may already be over the threshold where core inflation starts rising.
By Aayushi Chaudhary, Pranjul Bhandari & Priya Mehrishi
It’s a rise … it’s a surge … it’s a second wave. India’s total active cases are inching closer to the September peaks, led not just by Maharashtra (the main contributor), but also other states like Punjab, Karnataka and Gujarat. Health experts worry about a rapidly transmissible strain doing the rounds. Adding to the worries are a rising positivity rate, and an R-value that is greater than one. On the other hand, India’s COVID-19 mortality rate remains lower than the global average.
The pace of vaccine roll-out has picked up, but still has some way to go. With the entry of private hospitals, the pace of vaccination picked up in March. That said, India is currently administering c2.5mn jabs per day, compared to its capacity of more than double of that. The government’s decision on March 23, to allow all over 45 years of age (versus the over 60 years criteria earlier) to get vaccinated from April 1, could help close that gap. A scenario analysis suggests that if India manages 5mn jabs/day, it could cover over 50% of the population (2 jabs/person) by year end. Alongside this, sero surveys from January show that about 20% of the population may already have the antibodies.
Near-term drags are showing up … Localised restrictions have mushroomed over the last few weeks, but are largely in the form of night curfews. Some softening in mobility indicators like the Google and Apple mobility indices are showing up. But other high frequency indicators like electricity consumption, e-way bills generation, and labour force participation rate, have not seen a similar fall, at least as of yet.
… but recovery is still close to pre-pandemic levels… Our recovery tracker appears to have plateaued, but remains close to pre-pandemic levels. The new wave could be a temporary drag, but over time, as the vaccination drive picks up, so could economic activity, this time driven by pent-up services demand which remain 20% below normal.
… raising inflation fears: We believe that activity may already be over the threshold where core inflation starts rising. In fact, our diffusion index indicates that core inflation pressures are spreading. RBI is likely to make note of this in the April 7 policy meeting. We expect a gradual normalisation of monetary policy, although we do not expect repo rate hikes in the foreseeable future.
Edited excerpts from HSBC Global Research’s India Covid-19 Chartbook, dated March 24, 2021
Respectively, economist, chief economist (India), and associate, HSBC Securities and Capital Markets (India) Private Limited Views are personal