As the COVID-19 virus mutates, so do the challenges posed it. While the pandemic initially hit the global healthcare system the hardest, it soon began to affect economies all over the world. The lockdowns forced businesses to change their operation models. However, in India, the pandemic seems to have solved two major issues while generating a new worry.

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One blessing in disguise was the correction in high real lending rates that have been restricting growth since 2015. The rates were slashed to create market demand and now even as the routine activities return to normalcy, the softer lending rates are likely to persist. The market is expected to see a shallow recovery driven by the rebound of consumption with some support from higher autumn Kharif harvest farming income.

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The softer lending rates are expected to continue with a reasonable average of 5.5 percent in FY 2022-23. CPI inflation should allow the RBI to gradually normalise policy (100bp policy rate hike in FY23CL) without risking recovery.

The hike in the foreign exchange reserves of India during the COVID-19 pandemic is being seen as a facilitator to the Indian rupee’s revival. RBI Governor Shaktikanta Das has bought foreign exchange of 6 percent of GDP to date, taking advantage of global liquidity.

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The RBI will likely still buy forex if the dollar weakens and will allow the rupee to depreciate to Rs 75/dollar if it strengthens. On balance, we see Rs 73-76.50/dollar in FY22-23. This should keep average annual depreciation to 2 percent (FY13-20: 5.2 percent) and treble foreign portfolio investor (FPI) inflows to average 1 percent of GDP.

The indicators, however, also point to a larger demand problem in the Indian economy. It began as a supply shock as activity shut down to contain the spread of the disease but has now metamorphosed into a demand shock as the lockdown impacted incomes/jobs.

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This will likely need additional demand side measures in Budget 2022. The recent fuel tax cuts were also introduced as a measure to boost the demand in the market.

(Edited by : Shoma Bhattacharjee)

First Published:Dec 3, 2021 6:01 PM IST