“Cost-push pressures arising from supply disruptions and demand revival have shown up in consumer prices in June 2020,” it said.
In its statement, the MPC highlighted that government spending remained subdued during the pandemic. But more importantly, it recognised the stress in balance sheets of many “viable” companies.
The MPC has still not given its numerical estimate for GDP growth for the quarters adversely affected by Covid-19.
The National Statistical Office, however, will give its official GDP growth estimate for the June quarter at the end of this month. Supply disruptions are pushing inflation up for both the food and non-food segments. The MPC said a bumper rabi harvest and benign increases in support prices for upcoming kharif crops might tame food inflation. But it needs support from enhanced procurement from the government, it added. Cost pressures from high retail petrol and diesel prices at fuel stations, hikes in telecom charges, and rising raw material costs are pushing up non-food inflation, it added.
While agriculture would remain a bright spot in FY21 in terms of growth, non-farm high frequency indicators, which had improved post Unlock, have now “levelled off,” the statement noted. The rural sector would provide a fillip, as fertiliser production and sales of tractors, motorcycles and fast-moving consumer goods look promising. Except pharmaceuticals, the industry is expected to contract sharply, as the RBI’s business assessment index for the June quarter hit its lowest ever. Capital goods imports fell stronger than expected in June, signalling a deterioration in investment demand.
A sharp fall in imports in June and deterioration in consumer confidence in July indicate weakening of domestic demand. External demand, too, is expected to remain anaemic, the statement said. Producers sold goods at prices lower than in Q1 of the previous year, and they saved on their wage bills — indicative of a fall in salaried class incomes. A more protracted spread of Covid-19, deviations from expected normalcy in monsoon rains, and volatility in the global financial system would dent the GDP contraction further, the MPC said. Keeping consumer inflation anchored at 4 per cent with a band gap of two percentage points is the MPC’s mandate under the inflation targeting framework. But the committee, for the first time, said supporting growth had assumed primacy when the state of the economy was “extremely weak” due to the pandemic shock.