Recovery on track, albeit some moderation

The December issue of RBI's report observed consumers that are buoyed by sentiments on income and employment

The Reserve Bank of India’s state of the economy report has painted an encouraging picture for the economy as there is a gradual return of consumer confidence, inching up of mobility indicators, improved hiring activity and demand indicators pointing to sustained recovery across spheres, albeit some signs of sequential moderation.

The December issue of the report observed consumers that are buoyed by sentiments on income and employment, telecom and internet services driving hiring activities, construction sector activity gathering pace backed by a spurt in cement production and demand for residential units gaining momentum.

The report noted that the ongoing revival is driven by a confluence of factors – release of pent-up demand, government’s push for capital expenditure, robust external demand and a normal monsoon. “Faster resumption of contact-intensive services and speedy restoration of consumer confidence brightens near-term prospects,” it said.

Demand

On the demand side, e-way bills generation remained above pre-pandemic levels, with some sequential dip in the first half of November on account of festive season fatigue. It, however, picked up again in early December. Toll collections remained resilient with 71.5 per cent year-on-year (YoY) growth in November 2021.

Similarly, the end of the festive season reflected in some moderation in petroleum consumption, mainly due to diesel, though petrol consumption remained above pre-pandemic levels. Aviation turbine fuel recorded a steady pick-up in November 2021.

The automobile sector continued to suffer on account of global supply shortages. Rural demand also moderated due to a high base and delayed harvest of the Kharif crop. Railway freight traffic growth moderated to 6.1 per cent, as compared to 9 per cent a year ago. Port traffic growth, too, moderated since shipping hurdles and container shortages worsened globally. In the aviation space, both passenger and cargo traffic have been on the pick-up mode since August 2021, with both international and domestic cargo freight normalising in November 2021.

“Passenger traffic has been gathering steam on the back of festive season travel. However, new travel guidelines coming in the wake of Omicron might derail the nascent growth,” the report said.

Sticky core inflation

Headline inflation for November inched up 4.9 per cent year-on-year, which is 43 bps higher than October. Price momentum (month-on-month change in prices in the current month) of around 70 bps was partially offset by favourable base effects of around 30 bps.

Though headline inflation remained within the central bank’s tolerance band, CPI inflation excluding food and fuel or core inflation edged up to 6.2 per cent in November from 5.9 per cent in October on the back of a pick-up in inflation in clothing and footwear, household goods and services, recreation and amusement, housing, and personal care and effects sub-groups. Inflation in transport and communication and health sub-groups remained elevated.

In the first half of December, retail selling prices of petrol and diesel in the four major metros remained largely unchanged, barring the reduction of Rs 8.56/litre in petrol pump prices in Delhi on December 2, 2021, due to a cut in the VAT rate. LPG prices have remained steady since October 2021, while kerosene prices registered a decline in the first half of December, the report said.

Rates hardening

While overnight money market rates gravitated toward the lower bound of the policy corridor after a brief period of hardening, rate of commercial papers, certificate of deposits, and three month T-bill rates continued to hover higher reflecting repriced monetary policy expectations at the short end of the curve since the October policy, reinforced by hawkish Fed policy minutes, the report said.

At the short end of the curve, G-sec yields exhibited a hardening bias while yields for longer maturities generally declined, flattening the yield curve.

The 10-year G-sec yield closed at 6.39 per cent on December 7, hardening from 6.37 per cent earlier.

“Mirroring G-sec yields, corporate bond yields too hardened for short tenors – yields on AAA-rated 1-year and 3-year bonds increased by 15 bps and 26 bps, respectively, during the second half of November 2021 and early December,” the RBI report said.

Omicron concern

The new Omicron variant of the Covid-19 has heightened the uncertainty in the global
macroeconomic environment, accelerating risks to global trade with the resumption of travel restrictions/ quarantine rules at major ports and airports, the report said, adding that the ongoing supply-side constraints are likely
to keep input prices and freight rates at elevated levels and could act as a drag on overall exports.

The concern of Omicron has forced the central bank to pause its liquidity normalisation process during the December review of monetary policy. The central bank, while keeping the repo rate unchanged, continued with the accommodative stance.

There was an expectation among market participants that the reverse repo will be hiked to narrow the rate corridor, but the reverse repo rate was also left unchanged.

“While the low domestic infection count and healthy pace of vaccinations augur well for the economy, looming threat of Omicron calls for observing greater caution and readiness to respond swiftly,” the report said.

(The writer is a Mumbai-based journalist)

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