India exhibits stronger economic pick-up than expected

Dubai - Macroeconomic outlook, financial market conditions improve after witnessing massive Covid-induced contraction

The Indian economy has exhibited a stronger pick-up in the momentum of recovery than expected, Reserve Bank of India (RBI) governor Shaktikanta Das said on Thursday.

However, one needs to be watchful of demand sustainability after the festive season, the apex bank head cautioned while addressing the fourth Annual Day of Foreign Exchange Dealers’ Association of India.

“The macroeconomic outlook and the financial market conditions have improved after witnessing a contraction in GDP by 23.9 per cent in the first quarter of the current financial year. We have seen a normalisation of activity in the second quarter. The Indian economy has exhibited stronger-than-expected pick-up in momentum of recovery. The global economy too has witnessed a stronger-than-expected rebound in activity in the third quarter,” Das said.

“Even as the growth outlook improved, downside risks to growth continue due to recent surge in infections in advanced economies and parts of India. We need to be watchful about the sustainability of demand after festivals and a possible reassessment of market expectations surrounding the vaccine.”

Das said a key source of resilience in recent months has been the comfortable external balance position of India supported by surplus current account balances over two consecutive quarters, resumption of portfolio capital inflows on the back of robust FDI inflows and sustained build-up of foreign exchange reserves.

He pointed out that the RBI had acted proactively and nimble-footed to ease financial market conditions and mitigate risks with a slew of conventional and unconventional measures. “The RBI remains committed to fostering orderly functioning of financial markets as well as and we’ll continue to evaluate incoming information and will act as needed to mitigate any downside risks,” he said.

He said the ongoing reforms are ushering in a simplified principle-based regulatory framework, adding that capital account convertibility will continue to be approached as a process, rather than as an event.

The RBI head noted that financial market conditions were benign at the start of the year, but witnessed serious stress due to the Covid-19 pandemic.

Increased volatility of financial prices was observed across most asset classes. Yields hardened in the government securities market and the yield curve steepened sharply amidst concerns about fiscal slippage and sustained sell-off by foreign portfolio investors, Das said.

“The government’s recent policy focus to enhance India’s participation in global value chains, including through production linked incentives for targeted sectors, can leverage on the strong external balance position of India,” Das argued. The recent reform measures, many of which are in the works, have been fashioned around the four major themes of liberalising financial markets and simplifying market regulation; internationalising financial markets; safeguarding the “buy side” – user protection; and ensuring resilience and safety, Das said.

Over the last three decades the pace of financial market reforms has gathered momentum, occasionally interrupted by financial crises, he said. “The markets have also traversed a long distance over the years. The bond markets in the country have become broad-based in terms of participation, availability of a variety of instruments and development of repo and derivative markets.”

— issacjohn@khaleejtimes.com

• India