Press Trust of india

Protracted spread of COVID-19 poses downside risk for economy: RBI

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Mumbai:  Sounding a note of caution that protracted spread of COVID-19 pandemic poses ‘downside risk’ for the domestic economy, RBI Governor Shaktikanta Das on Thursday said the central bank will use the available monetary space ‘judiciously’ to boost growth.

Although the economic growth rate in the current financial year will remain in the negative, early containment of the pandemic could impart an ‘upside’ to the growth outlook, the Governor said in a statement, while unveiling the bi-monthly monetary policy.

The six-member Monetary Policy Committee (MPC) headed by Das decided to keep the key policy rates unchanged after a three-day deliberation.

The MPC noted that “the economy is experiencing unprecedented stress in an austere global environment. Extreme uncertainty characterises the outlook, which is heavily contingent upon the intensity, spread and duration of the pandemic – particularly the heightened risks associated with a second wave of infections – and the discovery of the vaccine”.

RBI also said the stance of monetary policy remains accommodative as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy.

“The MPC noted that in an environment of unprecedented stress, supporting recovery of the economy assumes primacy in the conduct of monetary policy.

“While space for further monetary policy action is available, it is important to use it judiciously to maximise the beneficial effects for underlying economic activity. At the same time, the MPC is conscious of its medium term inflation target,” the Governor said.

As per the resolution of the MPC, economic activity in India had started to recover from the lows of April-May following the uneven re-opening of some parts of the country in June.

However, surge in fresh infections have forced re-clamping of lockdowns in several cities and states. Consequently, several high-frequency indicators have levelled off, it said.

“The agricultural sector has emerged as a bright spot. Its prospects have strengthened on the back of good spatial and temporal progress of the southwest monsoon,” said the RBI document.

It also noted that all manufacturing sub-sectors, except pharmaceuticals, remained in negative territory. The output of core industries in June contracted for the fourth successive month though with a considerable moderation.

High-frequency indicators of services sector activity for May-June indicate signs of a modest resumption of economic activity, especially in rural areas, although at levels lower than a year ago.

Notably, the decline in passenger vehicle sales moderated to (-) 49.6 per cent in June from (-) 85.3 per cent in May, indicative of tentative urban demand, and faster recovery of sales in rural areas, RBI said.

On the other hand, domestic air passenger traffic and cargo traffic continued to post sharp contraction. Construction activity also remained tepid.

It further said domestic financial conditions have eased substantially and systemic liquidity remains in large surplus, due to the conventional and unconventional measures by the Reserve Bank since February 2020.

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