RBI sees Omicron threat to growth; says corporate sector displays resilience, bank credit growth shows signs of recovery

The economy has steadily gained momentum and remained resilient since the second quarter of the current fiscal, however, the Omicron variant of coronavirus remains the major challenge along with rising inflation pressures, the Reserve Bank of India said in its second financial stability report.

In its report released on Wednesday, RBI Governor Shaktikanta Das mentioned that even ahead of Omicron, global growth and trade had begun to lose pace, stalled by formidable headwinds from supply disruptions and bottlenecks, logistics dysfunctions, shipping charges and port congestions as well as shortage in key intermediates and personnel.

These forces, along with elevated commodity prices, have rendered inflationary pressures persistent across geographies, posing a serious risk to global economic prospects. As an increasing number of advanced economy (AE) central banks join their emerging market economy (EME) counterparts in either raising monetary policy rates or in telegraphing faster normalisation, global financial conditions have tightened and turned volatile, it said.

Retrenchment in capital flows across most EMEs have amplified currency depreciation among these countries. Many of them are contending with large pandemic-induced losses of gross domestic product (GDP) and jobs that will take years to reclaim, even if pre-pandemic levels are being sighted by some. Overall global demand has weakened, with world GDP growth estimated to have lost a full percentage point in Q3:2021 on a sequential seasonally adjusted annualised basis. Overall, the near-term outlook remains clouded, with global growth projections being trimmed by multilateral agencies.

Das notes that after the destructive second wave in April-May 2021, the growth outlook has progressively improved, though there are headwinds from global developments and more recently from the Omicron virus.
A stronger and sustainable recovery hinges on the revival of private investment and shoring up private consumption, which unfortunately still remain below their pre-pandemic levels, he notes.

Admitting that inflation remains a concern as it is by the build-up of cost-push pressures, Das has called for stronger supply-side measures to contain food and energy prices.

Noting that the financial institutions have remained resilient amidst the pandemic and stability prevails in the financial markets cushioned by policy and regulatory support, the governor is confident that the strong balance sheets of banks with higher capital and liquidity buffers will help mitigate future shocks.

Quoting the stress tests on banks, the governor has also warned that gross NPAs may jump to 8.1-9.5 per cent by September 2022 from 6.9 per cent in September 2021.

The governor concluded by reiterating the Reserve Bank's resolute commitment to ensure a robust and efficient financial system that supports strong, sustainable and inclusive growth with macroeconomic and financial stability.