Revival of consumption, funding important for sustaining development: RBI

New Delhi, May 27

Amid uncertainties arising out of the second wave of Covid, the RBI on Thursday said a durable revival of private consumption and investment would be critical for sustaining economic growth post-pandemic.

Observing that 2020-21 has left a scar on the economy, RBI in its annual report said, “In the midst of the second wave as 2021-22 commences, pervasive despair is being lifted by cautious optimism built up by vaccination drives.” The second wave of the pandemic has prompted revision of growth projections for the current fiscal and the consensus appears to be gravitating towards RBI’s forecast of 10.5%, the report added.

Flags risk of bubble in stock market

  • The RBI on Thursday said the sharp rally in the domestic equity markets despite an estimated 8% contraction in GDP in 2020-21 poses the ‘risk of a bubble’
  • It also noted that the widening gap between stretched asset prices relative to prospects for recovery in real economic activity has emerged as a global policy concern
  • Pressures from food items like pulses and edible oils are likely to persist in view of supply-demand imbalances, while cereal prices may continue to soften with the bumper foodgrain production in FY21, it said

The pandemic, RBI cautioned, “is the biggest risk to this outlook. Yet, upsides also stem from the capex push by the government, rising capacity utilisation and the turnaround in capital goods imports.” In a separate box on what would drive growth recovery after the crisis, RBI said, “for a self-sustaining GDP growth trajectory post-Covid, a durable revival in private consumption and investment demand together would be critical as they account for around 85% of the GDP.” Typically, it added, post-crisis recoveries are led more by consumption than investment.

“However, investment-led recoveries can be more sustainable and can also lift consumption in parts by better job creation. In either case, private demand plays a pivotal role,” the report added.

The RBI has also cautioned banks to closely monitor their bad loans and prepare themselves for higher provisioning in the light of the Supreme Court lifting ban on non-performing asset (NPA) classification and outbreak of the second Covid wave. The waiver of compound interest on all loan accounts which opted for moratorium during March-August 2020 may put stress on the financial health of banks, the report added. — PTI

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