The Reserve Bank of India (RBI) has urged the markets to look at silver linings and shun gloom and doom ever since the covid-19 pandemic struck a year ago. Governor Shaktikanta Das has more reason now than ever to make markets look at the bright side of life.
The economic recovery is gaining traction, and monthly high-frequency data points have been looking up recently. Globally, most economies are back on the recovery path. India’s current account is back in deficit due to a rise in imports. This means domestic manufacturers are back to importing and increasing production.
Lockdowns amid the second wave of infections have been mostly regional. In his public addresses recently, Das has stressed that policymakers are far more prepared now to deal with the after-effects of a large-scale lockdown.
In essence, Das has downplayed the threats of the second wave so far.
“RBI will be focused on growth this time too. I think they will flag the rising infections as a risk but not sound alarmist,” said Abheek Barua, chief economist at HDFC Bank.
Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd agree.
“Less-stringent curbs, ongoing vaccine optimism, and firms and consumers better realigned to work amid social distancing suggest the economic impact of the second wave, at least for now, will be much more muted than during the first wave,” they wrote in a note dated 1 April.
That means the Reserve Bank can stick to its gross domestic product (GDP) growth forecast for FY22, which it had pegged at 10.5% in February.
To be sure, it may not mean RBI has gained confidence in the growth recovery. The fact that all eight core sectors showed a contraction in output in March surprised economists.
“Such confidence can emerge once the pandemic is under better control and as a sizeable proportion of the population is vaccinated. Bouts of fresh infections can deter recovery,” said Anubhuti Sahay, head of South Asia research at Standard Chartered Bank.
Then there is the old foe, inflation. Retail inflation rose to 5.03% in February, but the greater concern was core inflation’s rise to 5.6%. But the central government has kept the inflation target unchanged for the Reserve Bank at 2-6%.
That means governor Das has elbow room to keep growth-friendly measures.
“Recovering output lost to the covid pandemic could take longer than anticipated, and policymakers will be best served by letting the economy run ‘hot’ for a few quarters,” wrote Rahul Bajoria, chief India economist, Barclays Securities (India) Pvt. Ltd, in a note.
The upshot is that the central bank may pepper its guidance with enough reassurances on liquidity and keep the focus on the need for benign bond yields.
That brings us to the ongoing tussle between RBI and the bond market.
Bond investors don’t seem to believe that normalization of policy by the central bank would be non-disruptive. The central bank, on the other hand, has blamed bond investors for driving up yields and endangering economic recovery.
The moral suasion has worked on bond yields but may not last. Ergo, this adversarial tone may soften. The April policy gives RBI a golden chance to correct the gaps in communication, Bajoria said.
Governor Das may use the chance to smoothen ruffled feathers in the bond market. After all, the Centre’s borrowing would remain high. The success of the Reserve Bank’s policy hinges on Das making bond investors sing to British troupe Monty Python’s Always look at the bright side of life. Equity market investors, of course, are crooning.