On April 9, the Reserve Bank of India (RBI) said that Coronavirus would affect the Indian economy directly, accentuating the slowdown in economic growth–although its impact on inflation will remain ambiguous. The adverse effect of Coronavirus on the economy would be a result of domestic lockdown and probable slowdown of global trade and growth in post-Coronavirus conditions. RBI also talked about the immediate impact caused by “spillovers being transmitted through finance and confidence channels to domestic financial markets”.
RBI announced, “These effects and their interactions would inevitably accentuate the growth slowdown, which started in Q1:2018-19 and continued through H2:2019-20”. However, it mentioned that the inflation outlook has become highly uncertain since March as COVID-19 has been declared to be a pandemic. There has also been a sharp fall in crude oil prices, reaching lows not seen since the early 2000s.
Furthermore, due to lockdown, the National Statistical office would have a hard time in compiling and measuring consumer prices.
There can be a considerable decrease in demand, as several major economies are undergoing complete lockdown. While other countries are preparing to combat against the deflationary forces, India might not be immune to these severe depreciating pressures created by the pandemic.
The growth outlook for FY21 had been a positive slope before the outbreak, but now it had been changed. The contraction in global output born out of nationwide lockdown has plagued the growth outlook of FY21.
The ultimate result can only be estimated after the virus spread speed is checked and economic activity is restored to normal. The significant monetary and liquidity measures opted by the RBI, and the government’s fiscal measures would lessen the impact on domestic demand, eventually helping to boost economic activity when everything is back to normal. However, the risks related to inflation projections are balanced apparently at this point, and the probable outlook is “benign”.
The RBI had forecasted a collapse of 2.4 per cent of inflation in the fourth quarter of FY21 amidst extremely reduced demand rates, creating space for more rate cuts.
According to economist Radhika Rao, “These are still early days to gauge the impact of the lockdown on real data as most are released with a lag. The lockdown was a prudent move to arrest the transmission, but is likely to hurt growth in the short term.”
She further estimates the GDP growth of FY20 at 1.5 per cent and that of FY21 at 4.5 per cent.
The Monetary Policy Committee announced liquidity measures to pump in more than Rs. 3.7 lakh crores into the system as well as cut down the repo rate last month by 75 basis points to 4.4 per cent, a record low, to reduce pressure on the economy.
RBI fears that the second-round effects of COVID-19 could be more severe and would result in greater damage to global trade by further slowing down growth.
Nonetheless, Coronavirus threat looms large over the economic future of the country.