Aggregate Demand Becoming More Strong: RBI

Prospects have brightened for India's economy as the impact of second Covid wave wane and aggregate demand gains firmer ground, the Reserve Bank of India (RBI) said in its monthly Bulletin for August 2021.

The central bank noted that IIP and core industries mirrored improvement in industrial activity and services sector indicators point towards sustained recovery.

"The trajectory of inflation is shifting down more favourably than anticipated."

"As pandemic scars heal and supply conditions are restored with productivity gains, a sustained easing of core inflation can be expected, which will reinforce the growth-supportive stance of monetary policy."

Besides, the RBI analysed the divergences in monetary policy actions between emerging market economies and their correspondence with underlying macroeconomic performance.

The analysis showed that countries that have tightened monetary policy have also grown or have a forecast to grow rapidly, with several of them being commodity and services exporters benefiting from the boom in commodity prices and revenge tourism.

"A few EMEs are also beneficiaries of spillovers and trade advantages from better growth prospects in the US."

"Some of them are the most aggressive rate hikers of 2021 and have registered a near doubling of net exports in Q2 over Q1; a few of these EMEs recovered to their pre- pandemic level of output by Q2 itself."

Furthermore, countries that are on a pause despite medium to high inflation are those where economic rebound is not as sharp as the decline last year or compare unfavourably in terms of proportion of the population that is fully vaccinated.

"There are a few EMEs, which have undertaken further monetary stimulus or expected to follow suit include countries where inflation is low, albeit, rising; as also those which had fast recoveries from the pandemic but growth seems to be stalling, as per recent high frequency indicators."