India’s Virus Surge May Fan Supply-Side Inflation, RBI Says

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A failure to contain India’s deadly second wave of the pandemic in time risks disrupting domestic supply chains and carries inflationary implications, the central bank said Monday in its monthly bulletin.

India is now the global coronavirus hotspot with total cases topping 17.3 million and rising at more than 300,000 daily. The spike in virus numbers has prompted state governments to impose movement curbs, which in turn have tamped down economic activity as well as stoked price pressures because of broken supply chains.

India’s Virus Surge May Fan Supply-Side Inflation, RBI Says

In addition to ramping up pandemic protocols, vaccination and hospital capacity, the way forward involves “remaining resolutely focused on a post-pandemic future of strong and sustainable growth with macroeconomic and financial stability,” Michael Patra, deputy governor for monetary policy, wrote in the chapter ‘State of the Economy’ with Reserve Bank of India researchers.

Gains in wholesale inflation last month showed higher commodity prices and firmer input costs may feed into retail prices, which are already inching toward the RBI’s upper tolerance limit of 6%.

Firms surveyed by the Reserve Bank during the January-March period indicate a likely persistence of input price pressures well into 2021-22 and a gradual increase in selling prices, according to the bulletin.

Growth Outlook

The “outlook for the Indian economy is bright by any projection,” RBI’s Patra said. Even if the relatively conservative growth forecast holds, India’s gross domestic product in 2021-22 will exceed its level in the pre-pandemic year of 2019-20.

The RBI earlier this month retained its February forecast for a 10.5% expansion for the economy in the 12 months to March 2022. But risks of prolonged lockdowns in some of the most industrialized states in the country could dent some of the bullish forecasts.

Nevertheless, policy makers are likely to overlook inflation concerns for now to support a nascent economic revival. The RBI, which cut interest rates by 115 basis points last year, left its main repurchase rate unchanged at 4% this month, while retaining its pledge to keep rates lower for longer. The RBI separately formalized a quantitative easing program, aimed at keep borrowing costs in check.

“Policy makers know from painful experience it is perilous to withdraw stimulus too soon; that inflation is less sensitive to demand pressures than once feared; that central banks will lean towards growth in pandemic times, knowing that inflation is still only catching up,” the researchers wrote. They added that when markets lose faith and bet on tightening policy, they may end up bringing it about sooner than it is appropriate.

India’s Virus Surge May Fan Supply-Side Inflation, RBI Says

Governor Shaktikanta Das has said that monetary policy should remain accommodative to support, nurture and consolidate an economic recovery. But the recent surge in infections impart greater uncertainty and could delay the return to normalcy in economic activity, he had said.

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