Indian Economy May Bounce Back Quickly

The Reserve Bank of India (RBI) in its October 2020 monetary policy has indicated a three-speed economic recovery in India. After a gap of six months, RBI has provided projections of growth and inflation in India in FY21. According to RBI’s projection, India’s real GDP is likely to contract by 9.5% in FY21 with the balance of risks tilted to the downside. Due to strict lockdown observed in India, contraction of real GDP in Q1 of FY21 was 23.9%–one of the highest in the world. The contraction of real GDP may progressively decline going forward. RBI predicts that the real GDP growth is likely to be marginally positive in the last quarter of this year. Given the downside risks, one cannot be very sure whether full normalcy could be restored in the Q4 of FY21 unless local lockdowns are fully lifted. The current retail inflation outlook has been well above RBI’s maximum tolerance limit of 6% (7.3% in September). Food inflation was in double-digit (10.7% in September). This has been mainly due to unprecedented disruption in the supply chains. Inflationary pressures are expected to abate going forward due to the record level of farm harvest anticipated this year. Being a supply-side problem, RBI has indicated to see-through the temporary rise in food prices. Moreover, the government has waived RBI’s accountability of price rise during the Q1 of this year, which was mainly due to lockdown conditions.