COVID-19 Would Impact Economic Activity Due To Lockdowns: RBI Report

COVID-19 would impact economic activity in India directly due to lockdowns, the Reserve Bank of India has said in its Monetary Policy report released on Thursday.

"Financial markets across the world are experiencing extreme volatility; global commodity prices, especially of crude oil, have declined sharply. COVID-19 would impact economic activity in India directly due to lockdowns, and through second round effects operating through global trade and growth. The impact of COVID-19 on inflation 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 Monetary Policy Report stated.

"The disruption of economic activity in a wide swathe of affected countries is set to intensify in the face of headwinds in the form of massive dislocations in global production, supply chains, trade and tourism. Global output is now seen as contracting in 2020. Financial markets across the world are experiencing extreme volatility: equity markets recorded sharp sell-offs, with volatility touching levels seen during the global financial crisis; flights to safety have taken down sovereign bond yields to record lows; risk spreads have widened; and financial conditions have tightened".

Turning to the domestic economy, India has not been spared from the exponential spread of COVID-19 and by April 7, more than 4,700 cases had been reported, the RBI noted.

"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. More immediately, spillovers are being transmitted through finance and confidence channels to domestic financial markets. These effects and their interactions would inevitably accentuate the growth slowdown, which started in Q1:2018-19 and continued through H2:2019-20. Meanwhile, headline inflation stayed above the upper tolerance band of the inflation target band during December 2019-February 2020, led by a spike in vegetable prices," the RBI Monetary Policy Report noted.