Omicron threatens upcoming economic prospects

Omicron threatens upcoming economic prospects

Although the economy has been unevenly recovered from the pandemic, the latest variant of Omicron poses a threat to economic growth in the immediate future due to repeated spikes in inflation.

Despite the Indian economy expanding by 8.4% year-on-year (y-o-y) in July-September 2021, with the gross domestic product surpassing pre-pandemic levels (July-September 2019) for the first time since the pandemic struck, some recent high-frequency indicators suggest some loss of momentum in the third quarter of 2021-22, the Reserve Bank reported most recently in its Financial Stability Report.

There is heightened uncertainty due to Omicron. Despite losses, equity markets have managed to recover. According to the RBI’s latest assessment of the financial sector, the risk of sharp corrections remains high.

Spreads on corporate bonds have widened post-Omicron, but appetite remains strong. As the central banks reduce their extraordinary support for liquidity, short-term yields on government bonds are expected to rise more sharply than long-term rates, resulting in a flattening of the yield curve.

It is noted in the latest Financial Stability Report that inflationary pressures are on the rise in advanced economies, especially due to increases in energy prices of up to 30% year on year. The price of food is also far above its long-term average. Adding to inflation risks at home is the high price of food.

On the domestic front, the recovery that had been disrupted by the second wave of the pandemic has regained ground with the easing of local restrictions and progress in vaccination. Despite the Reserve Bank of India’s liquidity operations guaranteeing large liquidity surpluses in the system, the report points out that financial conditions remain favourable.

The vast majority of respondents to the RBI’s comprehensive survey to measure systemic risk felt that India’s economy would recover completely within 1-2 years; sectors such as tourism and hospitality, aviation, automobiles, small- and medium-sized enterprises, real estate, retail trade, and entertainment, however, could show a slower rate of recovery.

The growth of bank credit is gradually improving, although the flow of credit to smaller companies is tepid. In the report, the report noted that signs of incipient stress were emerging in micro, small and medium-sized enterprises (MSME), as well as in the microfinance sector.

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