By Shanti Ekambaram
A revival in the intake cycle after Covid 2.0, led by hidden need and surplus liquidity in the system, sustained development in the economy back to pre-pandemic levels in the July-September quarter. Higher unrefined rates, supply chain problems and agri produce rates led to greater inflation and core inflation stayed sticky.
The reserve bank had actually begun liquidity normalisation that saw the yield curve increasing. It was extensively anticipated there would be some policy step on moving the reverse repo rate in the December policy.
However, the brand-new Omicron version has actually captured everybody unawares and the scare of the brand-new alternative looms big. We are yet uncertain about Omicron’s strength, however it absolutely might press back the go back to normalcy if its spread magnifies in the next couple of weeks.
Growth is genuine
The GDP for the September quarter stands at 8.4% as compared to the contraction of 7.4% that was experienced a year ago in Q2 of FY2021. The GDP development in the September quarter was genuine and apparent throughout sectors.
Sequential momentum got as the economy opened after the 2nd wave and accompanied the start of the joyful season. There was a sharp pick-up in services. Consumers have actually been exercising their buying power led by the joyful push and appealing deals all around. The increasing vaccination levels likewise raised self-confidence in customers.
RBI’s accommodative position and liquidity push made sure that the long suppressed need made itself felt in the joyful season that started from October. That is how the economy got better in the September quarter and in October, did partially much better than the pre-pandemic age.
At the very same time, due to provide chain lacks, expense push inflation has actually been increasing. Inflation in wholesale rates was at a five-month high of 12.54% in October, as compared to 10.66% in September. Retail inflation, determined by the customer rate index, was at 4.32% in October as compared to 4.45% in September. While retail inflation appears to have actually softened in October, core inflation has actually been sticky.
Turning point in the economy
We are now at an inflection point in the economy. It was extensively anticipated that the RBI would now begin relaxing a few of the liquidity. We saw a few of that in the last month and the resultant motion in the yield curve.
The capital investment cycle has actually begun in pockets and is anticipated to increase. Travel has actually seen an upswing, home entertainment, shopping malls and dining establishments have actually slowly opened and intake need has actually been stable.
But Omicron has actually stired some quantity of unpredictability in the system. There is likely to be a downturn in travel and some discretionary intake. The next two-three weeks are vital to comprehend the strength and likely impact of Omicron. This might have some impact on the development trajectory if lockdowns or other such constraints are enforced.
Given this background, since now, the MPC will likely keep all the key rates the same. They will wait and see for even more information to make any relocation on rate action. They will continue to stabilize in between financial development and inflation and will utilize other tools at their disposal to handle liquidity. It will be very important to see the tone and story of the policy however action will likely transfer to the next fiscal year.
(The author is group president – customer banking, Kotak Mahindra Bank. The views revealed in the short article are individual)