RBI bulletin: ‘Demand shock biggest toll of second Covid wave’

The biggest toll of the current second wave of the Covid-19 pandemic is in terms of a demand shock (loss of mobility, discretionary spending and employment, besides inventory accumulation), although aggregate supply is less impacted, the Reserve Bank of India (RBI) said in its latest monthly bulletin on Monday.

Nevertheless, the loss of growth momentum is not as severe as at this time a year ago, when the country had witnessed a Covid-induced lockdown, it said. In the absence of several high-frequency data for April-May, this assessment, however, is tentative at this stage, it added.

While industrial production in March surged out of a two-month contraction (it shot up by 22.4%) on the tailwinds of a large favourable base effect, seasonally-adjusted annualised month-on-month momentum was positive for the fourth consecutive month. “Yet anecdotal evidence points to feedback loops from the demand contraction seeping through into curtailments of output in the months ahead unless infections ebb,” according to the bulletin.

The Nomura India Business Resumption Index (NIBRI) dropped to 61.9 for the week ending May 16 from 66.1 in the previous week. The index is now at the levels last witnessed in June 2020, even though it had fully recovered in February 2021. This loss of momentum is caused by a plunge in mobility in the wake of renewed Covid-induced curbs. Google’s workplace and retail & recreation mobility indices dropped by 5 percentage points and 8.4 percentage points, respectively, from the week before, while the Apple driving index declined by 3.4 percentage points.

The central bank had last month projected real GDP growth of 26.2% for the first quarter of FY22 (primarily driven by a favourable base effect, as real GDP had contracted by 24.4% in the same quarter last fiscal due to lockdown). However, this forecast was made on April 7, before the full fury of the Covid resurgence.

According to the RBI bulletin, corporate performance, meanwhile, is positioning itself for a turn in the business cycle. The initial set of earnings results declared by 288 Indian listed companies (making up for around 51% of the market capitalisation of all listed non-financial companies) for the March quarter marks a distinct shift from the previous quarters, with top-line growth gaining prominence in a broad-based manner, the RBI said.

Thanks to the pandemic, the consolidated balance sheet of non-banking finance companies (NBFCs) grew at a slower pace in the second and third quarters of FY21. However, NBFCs were able to continue credit intermediation, albeit at a lower rate. “The RBI and the government undertook various liquidity augmenting measures to tackle COVID-19 disruptions, which facilitated favourable market conditions as indicated by the pick-up in debenture issuances,” it said.

The profitability of the sector improved marginally in the second and third quarters of FY21, as NBFCs’ expenditures witnessed a steeper fall than their income. Their asset quality, too, improved in the September and December quarters from a year earlier, mainly due to regulatory forbearance to mitigate the impact of pandemic.