India's economy has not moderated as much as it did during the first wave of the coronavirus, but uncertainties may act as a short-term deterrent and private demand will be key to revival, the Reserve Bank of India (RBI) said on Thursday.

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The RBI, in its annual report, said that the country's growth prospects now essentially depend on how fast India can arrest its second wave of COVID-19 infections.

"For a self-sustaining GDP growth trajectory post-COVID-19, a durable revival in private consumption and investment demand together would be critical as they account for around 85 percent of GDP," RBI said.

"Typically, post-crisis recoveries have been led more by consumption than investment; however, investment-led recoveries can be more sustainable and can also lift consumption in parts by better job creation," it added.

India on Thursday posted 211,298 new coronavirus cases over the past 24 hours, while deaths from COVID-19 rose by 3,847.

RBI said central and state government deficits could rise when revised estimates are released and high levels of deficit and debt could pose challenges in financing once private investment picks up.

RBI said its balance sheet increased by 6.99 percent in FY21 to Rs 57.08 trillion ($785.7 billion), mainly reflecting its liquidity and foreign exchange operations. The bank's income decreased by 10.96 percent but its expenditure also fell by 63.10 percent, it said.

Ananth Narayan, Professor at SPJIMR said, “The expansion in the balance sheet for FY20 was quite large which meant that the amount of extra retained earnings the RBI required in order to meet that 5.5 percent requirement of the Bimal Jalan Committee Report was quite substantial. This time between July and March the expansion in the balance sheet is not that much; it is high, but not that much, and therefore the number required to meet that 5.5 percent is on the lower side compared to last year.”

The central bank reported net gains of Rs 506.29 billion from its foreign exchange (FX) transactions in FY21 as against Rs 29.993 billion in FY20, a key contributor to the 73.5 percent higher surplus transfer to the government last week apart from its higher interest income.

“There are telltale signs to show that the RBI has used FX churn to generate a higher dividend this time around. The market was expecting a low dividend with a truncated fiscal year this year – from July to March, and the interest accrual number is indeed on the lower side but that has been made up by about Rs 55,000 crore of income of the FX side, ” Narayan told CNBC-TV18.

RBI's board approved a significantly higher than expected surplus transfer of Rs 991.22 billion to the government last Friday, but it may not be enough to cushion the damage from a crippling second wave of the novel coronavirus.

RBI added that reform measures in various areas were likely to improve India's growth potential on a sustainable basis.

With text inputs from Reuters.

(Edited by : Abhishek Jha)

First Published:May 27, 2021 3:25 PM IST