The outlook for India's economic recovery has been sharply altered by the coronavirus outbreak, the central bank said in its Monetary Policy Report, underlining the pandemic's deepening impact on South Asia's engine of growth.
"Prior to the outbreak of COVID-19, the outlook for growth for 2020-21 was looking up," the Reserve Bank of India said. "The COVID-19 pandemic has drastically altered this outlook. The global economy is expected to slump into recession in 2020, as post-COVID projections indicate."
"Aggregate demand is expected to be impacted adversely by likely recession in the global economy, caused by disruptions in global supply chains, travel and tourism, and lockdowns in many economies," it said. "The oppressive force of the novel coronavirus (COVID-19) on weak or moderating high-frequency indicators of activity, barring agriculture, indicates that the implicit real GDP growth for Q4:2019-20 in the NSO’s data release could be undershot by a fair margin. In fact, the widening incidence of COVID-19 in March 2020 may produce downward pulls to Q4 GDP."
India has been in a nationwide lockdown since March 25, with reports hinting at a likelihood of the extension.
"While efforts are being mounted on a war footing to arrest its spread, COVID-19 would impact economic activity in India directly through domestic lockdown. Second round effects would operate through a severe slowdown in global trade and growth," the RBI said.
The lockdown is expected to significantly lower aggregate demand in both rural and urban areas, the monetary policy report said.
The central bank had, last month, also announced to inject rupee and dollar liquidity in the domestic markets.
The RBI noted although there has been a sharp fall in global crude prices which, if sustained, could improve the country’s terms of trade, "the gain from this channel is not expected to offset the drag from the shutdown and loss of external demand".
India's economy expanded at its slowest pace in more than six years in the last three months of 2019 and nationwide lockdown is set to sharply impact March quarter growth.
Describing the present environment as "highly fluid", the central bank said it is assessing the "the intensity, spread and duration of COVID-19."
On inflation, the RBI said the impact of COVID-19 is ambiguous, with a possible decline in food prices likely to be offset by potential cost-push increases in prices of non-food items due to supply disruptions.
The RBI projected CPI inflation to ease to 4.8% in the June quarter, 4.4% in the September quarter, 2.7% in the December quarter and 2.4% in the March quarter of fiscal year 2020-21, "with the caveat that in the prevailing high uncertainty, aggregate demand may weaken further than currently anticipated and ease core inflation further, while supply bottlenecks could exacerbate pressures more than expected".
India's economy expanded at its slowest pace in more than six years in the last three months of 2019 and was projected to clock in full-year growth of 5% which would be the lowest in over a decade.
Any benefit seen in the terms of trade from a prolonged downturn in the price of international crude is also unlikely to offset the economic drag from the coronavirus-induced lockdown of the country and loss of external demand, the central bank said.
India has reported over 5,000 active coronavirus cases and 166 deaths as of Thursday morning.
(With inputs from Reuters)