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Following India’s success in containing the first wave of infections, a second wave, worsened by a new double mutation variant – thought to be behind the sudden surge in cases that overwhelmed hospitals, is threatening India’s economic recovery.
With India’s caseload far surpassing last year’s pandemic peak and inoculation drive lagging despite a strong start in January, officials are under intense pressure to take the necessary action to mitigate the spread, hospitalisations, and ultimately deaths.
To date, a nationwide lockdown has not yet been imposed. Regional authorities, however, have imposed lockdowns and curfews to slow the spread of the virus.
Albeit the need for such measures, coronavirus inflicted restrictions on businesses and public activities, risk undermining what was projected to be a robust economic rebound, following one of the world’s sharpest pandemic-induced contractions.
Consequent to the recent surge in coronavirus infections and thus adverse impact on the healthcare system and economy, the nation’s currency; Indian rupee, reversed its strong start to 2021.
Indian rupee spiralling lower
As the nation battles a ferocious wave of coronavirus infections, India’s currency swung from emerging market leader to laggard, prompting concerns among investors that the promising recovery will crumble.
Since the beginning of April, the Indian rupee dropped by approximately 3 per cent, to 74.98 per dollar – one of the worst performances among emerging market peers. The drop marked a stark reversal for India’s rupee – the only emerging market currency to gain ground on the U.S. dollar in the first three months of 2021.
In its April meeting, the Reserve Bank of India (RBI) – concerned over a second coronavirus wave and an acceleration in food inflation, kept its benchmark repurchase rate, unchanged at a record low of 4 per cent, maintaining an accommodative stance.
The bank plans to remain accommodative for as long as necessary to sustain growth and continue to mitigate the impact of the health crisis while ensuring that inflation remains within target.
In addition to maintaining its benchmark repurchase rate, the RBI took a step towards formalizing quantitative easing by pledging to buy up to 1 trillion rupees of bonds, equivalent to $14 billion, this quarter. This, to keep borrowing costs low and support the economic recovery.
While the RBI has been purchasing government securities in the secondary market, this is the first time India’s central bank is committing to an amount upfront.
Reserve Bank of India Governor Shaktikanta Das stated that the bank bought 3.1 trillion rupees worth of government bonds in the previous fiscal year, ending March 31st, and planned similar or more purchases in this fiscal.
Following a Covid-ravaged 2020-2021 fiscal year (April 2020 to March 2021), India’s economy is projected to have contracted by 7.5 per cent – a significantly low base.
The International Monetary Fund (IMF) forecasts economic growth of 12.5 per cent for this fiscal year (April 2021 to March 2022). A double-digit growth set to make India the fastest-growing large economy in the world.
The estimate, although plausible, seems ambitious given the recent surge in coronavirus infections and drop in mobility, ensuing the restrictions imposed by regional authorities.
Fiscal stimulus package
Although the number of coronavirus infections in India is currently at an all-time high, the economic impact as of now seems far lower than what was previously envisaged. In April 2020, the entire country was in complete lockdown and the economic impact was significant.
The recent surge in coronavirus infections and ensuing restrictions have however prompted calls for additional fiscal stimulus to avoid derailing India’s economic recovery. Albeit nothing is set in stone, the likelihood of further fiscal stimulus is, as things stand, high and will probably be targeted to small businesses and less privileged. The latter, already struggling with higher food prices while their source of income dogged with uncertainty.
Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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