Covid-19: RBI warns of downside risk to economy

Das says that a calibrated opening up of economy can supplement domestic savings and help economic acceleration

Amid a small uptick in economic indicators bringing some cheer, Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday warned of a downside risk to economic growth due to the recent surge in Covid-19 infections.

Das, however, said that a calibrated opening up of economy can supplement domestic savings and help economic acceleration.

The sustainability of demand after festivals and a possible reassessment of market expectations surrounding the vaccine need a close watch, he said at an event of the Foreign Exchange Dealers' Association of India (FEDAI).

He, however, said that economic recovery was stronger than expected after the government and the RBI took many unconventional measures.

"After witnessing a sharp contraction by 23.9% in Q1 and a multi-speed normalisation of activity in Q2, the Indian economy has exhibited a stronger than expected pick-up in momentum of recovery," he said.

Das said capital account convertibility (CAC) will continue to be approached as a process rather than an event, taking cognizance of prevalent macroeconomic conditions. A long-term vision with short- and medium-term goals is the way ahead.

CAC refers to the freedom of conversion of domestic currency into a foreign currency to enable a resident to acquire any foreign asset, or the conversion of a foreign currency to domestic currency to enable a non-resident to acquire a domestic asset.

The RBI governor also urged stakeholders to put in efforts for ensuring a smooth transition from LIBOR, or London Interbank Offered Rate, to other borrowing benchmarks.

LIBOR, which is the global benchmark for borrowings, is expected to cease by the end of next year. The RBI has been planning to replace it with the Mumbai Interbank Forward Outright Rate (MIFOR).

India's exposure to LIBOR-linked borrowings, bonds, deposits and derivative contracts is pegged at $331 billion.