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Sharp rise in retail inflation will impact economic revival

by BQ News Bureau
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Reserve Bank of India Governor Shaktikanta Das expressed his concern over sharp rise in retail inflation as it would impact on the country’s economic growth revival.

In the minutes of the Monetary Policy Committee Meeting  released by RBI here on Thursday, he stated  that  outlook for the domestic economy remains extremely uncertain as the impact of corona is more severe than initial assessments.

Even as high frequency indicators suggest some momentum in July, the near-term outlook remains uninspiring with large downside risks.

Sale of automobiles (wholesale), electricity generation and issuance of e-way bills indicated that a moderate recovery was taking place in the domestic economy. Indicators relating to investment like cement and steel production saw some moderation in the pace of contraction to 6.9 percent and 33.8 percent, respectively in June as compared to the previous two months. Signs of recovery in June have again slumped after re-imposition of lockdowns in several states and cities he pointed out.

On growth outlook, the rural economy is expected to be robust while industrial and services activity may recover gradually.  The recovery out of the current slowdown would depend on the containment of Covid pandemic and unlocking of economic activities. High frequency indicators suggest that private consumption which is the mainstay of aggregate demand remains subdued.

Certain crucial sectors such as tourism, hospitality and entertainment will take some time to recover. Consumer confidence is low; however, one year ahead expectations have improved and indicate some optimism. External demand is expected to remain frail. Manufacturing firms expect domestic demand to recover gradually from the second quarter next fiscal and to sustain through the first quarter of next fiscal. Low capacity utilisation amid subdued domestic and external demand is likely to delay early revival of investment demand. In view of the above, real GDP is likely to shrink in the first half of the year, and growth for the full year 2020-21 is estimated to be negative, he added.

Although there is headroom for further monetary policy action, at this juncture it is important to keep our arsenal dry and use it judiciously. We should wait for some more time for the cumulative 250 basis points reduction in policy rate to seep into the financial system and further reduce interest rates and spreads.

As the economy continues to be in a fragile state, recovery in growth assumes primacy. It would be prudent at this stage to wait for a firmer assessment of the outlook for growth and inflation as the staggered opening of the economy progresses, supply bottlenecks ease and the price reporting pattern stabilizes, he added.

 

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