Barring a second COVID-19 wave, the worst is over for the economy and policymakers may soon have more room to support a recovery, the Reserve Bank of India (RBI) recently said. “Recent shifts in the macroeconomic landscape have brightened the outlook, with GDP in striking distance of attaining positive territory and inflation easing closer to the target,” it said.
“If these movements sustain, policy space could open up to further support the recovery,” RBI said in an article on the state of the economy in its January bulletin.
RBI expects the country’s economy to contract by 7.5 per cent in this fiscal and feels growth will be mostly driven by consumption. It slashed interest rates early last year to cushion the shock from the coronavirus crisis, but has left rates unchanged in recent months, cautious of rising inflation.
The need to kickstart investment is growing more urgent to secure a durable turnaround and a sustainable growth trajectory, it said.
It also added that the cash sitting idly on the balance sheet of companies and banks and the funds parked with it at the reverse repo must find their way towards productive sectors and into real spending on investment activity, before it imposes a persistent deflationary weight on real activity.
RBI said stress on financial sector balance sheets could increase, but banks are in a better position now than they were during the 2008 global financial crisis.
It also noted a ‘vigorous resumption’ of government spending which acts as an important growth driver when all other components of the gross domestic product are in deep retrenchment due to the pandemic.