Second wave hit demand more than supply, says RBI, CFO News, ETCFO

Mumbai: The RBI has said the resurgence of Covid has dented but not debilitated economic activity in the first half of Q1FY22. The central bank added that the loss of momentum may not be as severe this time compared to Q1 of last fiscal.

Pointing out that the second wave has overwhelmed India and the world, the RBI said that real economic indicators have moderated in April-May 2021. “The biggest toll of the second wave is in terms of a demand shock — loss of mobility, discretionary spending and employment, besides inventory accumulation, while aggregate supply is less impacted.”

The central bank, in its monthly ‘State of the Economy’ report, notes that the fourth-quarter results of 288 companies point to a distinct shift from previous quarters, with top line growth gaining prominence in a broad-based manner. These companies constitute half the market capitalisation in the stock markets.

Meanwhile, State Bank of India (SBI) warned in a report that the increase in healthcare spends on account of Covid, rising fuel prices and online delivery of articles risks crowding out consumer spending. According to SBI group’s chief economist Soumya Kanti Ghosh, health expenditure, which currently constitutes 5% of overall inflation basket, may jump to at least 11% due to the pandemic. Consumers are likely to make up for this by cutting back on other items of discretionary consumption, he said.

Besides health, rising fuel prices, which includes petrol and LPG, are bringing down spending capacity of Indians. He pointed out that the share of non-discretionary spend has risen to 59% in April from 52% in March. This is not good for the economy, he said.

The RBI-published report’s positive comments come at a time when most forecasters are downgrading their growth targets for the economy. On Monday, Moody’s said that the resurgence of coronavirus will delay earnings recovery for Indian corporates but it also denied other demand factors that will compensate.

“Movement restrictions and weaker consumer sentiment amid the second virus wave will hit housing and automobile sales as well as transportation-fuel demand temporarily. Still, rising consumer preference for remote working and personal mobility solutions will drive long-term demand for bigger homes and entry-level cars,” says Sweta Patodia, a Moody’s Analyst. “Demand for IT and telecommunication services will remain strong despite our expectation of a slowdown in economic activity over the next few months.”

Similarly, strong global demand could boost exports from Indian steel-makers but cement consumption growth is expected to be lower than Moody’s previous forecast of 10-12%.

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