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Near-term economic prospects brighter on hopes Omicron a flash flood, not wave: RBI

Near-term economic prospects have brightened on hopes that the surge in COVID-19 cases caused by the Omicron variant may only be a “flash flood” and not a wave, according to staff of the Reserve Bank of India (RBI).

“As the world stepped into the new year, the path of the recovery in India as in the rest of the global economy encountered headwinds from a rapid surge in infections due to Omicron,” RBI staff wrote in their monthly State of the Economy article, released on January 17.

“More recently, expectations that Omicron may turn out to be more of a flash flood than a wave have brightened near-term prospects,” the article added.

The article, authored by staff from various departments of the RBI, does not necessarily represent the views of the central bank.

The rapid increase in daily infections starting late December 2021 forced the re-imposition of restrictions on movement and activity in several parts of the country. However, daily new cases are already showing a decline. As per a government update on January 17, India saw 2.58 lakh new cases in the last 24 hours, down from 2.71 lakh new cases as per a January 16 update.

However, the article admitted the surge in new infections had hurt India’s economic recovery, which has been underway ever since the deadly second COVID-19 wave ebbed in the middle of 2021.

On the whole, RBI staff see economic activity in India having remained strong, with demand conditions staying resilient.

Commenting on the domestic financial conditions, the article said developments had been “in line with the Reserve Bank’s objective of nurturing the nascent recovery”.

“Surplus liquidity and forward guidance on the monetary policy stance continue to facilitate monetary transmission,” the article added, although it noted that interest rates on the government’s small savings schemes for January-March 2022 are 42-168 basis points higher than the formula-based interest rates.

Interest rates on small saving schemes are linked to market yields on government securities of comparable maturities. Last month, the government left these interest rates unchanged for the seventh straight quarter. Moneycontrol

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