Coronavirus 'spectre' hangs over India's future, says RBI

The global macroeconomic outlook is overcast with extreme volatility in financial markets and massive dislocations in global production, supply chains, trade and tourism, says the Reserve Bank of India's (RBI) Monetary Policy Report. The RBI said that even India has not been spared from the exponential spread of coronavirus and that "hangs over the future, like a spectre".

Highlighting the coronavirus pandemic's deepening impact on Indian economy, the central bank said that though efforts are being mounted on a war footing to arrest its spread, COVID-19 would hit domestic economic activity directly through nationwide lockdown. COVID-19, followed by lockdowns and the expected contraction in global output in 2020, may weigh heavily on the growth outlook.

According to the RBI, the actual outcome would depend upon the speed with which the outbreak is contained and economic activity returns to normalcy. The monetary and liquidity measures taken by the central bank and fiscal measures by the government would mitigate the adverse impact on domestic demand and help spur economic activity once normalcy is restored, it said.

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On inflation, the central bank said that the impact of COVID-19 may be 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. "Risks around the inflation projections appear balanced at this juncture and the tentative outlook is benign relative to recent history," it said.

Here are key takeaways from RBI MPC Minutes:

CPI inflation tentatively projected to ease to 4.8% in Q1FY21

The RBI has tentatively projected CPI inflation to ease from 4.8 per cent in Q1FY21 to 4.4 per cent in Q2, 2.7 per cent in Q3 and 2.4 per cent in Q4, much lower than the RBI's upper tolerance band of 6 per cent. The central bank, however, warned that in the "prevailing high uncertainty, aggregate demand may weaken further than currently anticipated and ease core inflation further, while supply bottlenecks could exacerbate pressures more than expected".

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According to RBI, the compilation of the CPI for March and the following few months could be challenging due to lockdown. For financial year 2021-22, the CPI inflation has been pegged in a range of 3.6-3.8 per cent, assuming a normal monsoon and no major exogenous or policy shocks.

Global economy to slump into recession in 2020

In wake of coronavirus pandemic, the global economy is expected to slump into recession in 2020 due to massive disruption in production, volatility in financial markets, sharp decline in global commodity prices, especially crude oil, as per the RBI MPC report. "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," it said.

Food inflation my drag headline inflation by 50 bps

The RBI said that adequate buffer stocks in cereals and a good rabi harvest (2019 season) could soften food inflation more than anticipated and pull down headline inflation by 50 bps below the baseline. On the other hand, a deficient or spatially skewed south-west monsoon, and an unexpected hardening of prices of non-vegetable food items could push headline inflation above the baseline by around 50 bps in 2020-21.

Rupee to stay under pressure amid volatility in global market

The Indian rupee may continue to stay under pressure against the dollar due to a probable rise in volatility in the international financial markets caused by the uncertainty of macroeconomic impact of the COVID-19. "An appreciation of the rupee by 5 per cent could moderate inflation by around 20 bps and GDP growth by around 15 bps vis-a-vis the baseline," the RBI said. In contrast, if COVID-19 normalises quickly, strong capital flows could revive, it added.

Crude oil prices hang in the balance

The fate of crude oil prices in the short and medium-term remain highly uncertain, says RBI. "A V-shaped global recovery due to an early containment of the COVID-19 or renewed geopolitical tensions or an agreement on production cuts could lead to a sharp reversal in international crude oil prices," it said.