Observing that it was difficult to make growth projections at this point of time, the Reserve Bank in its Monetary Policy Report said the lockdown following the outbreak of COVID-19 and expected contraction in global outlook would weigh heavily on the growth outlook.
It said prior to the outbreak, the outlook for growth for 2020-21 was looking up.
The RBI noted that the bumper rabi harvest and higher food prices during 2019-20 provided conducive conditions for the strengthening of rural demand, the transmission of past reductions in the policy rate to bank lending rates has been improving, and reductions in the tax rates and measures to boost rural and infrastructurespending were directed at boosting domestic demand more generally.
"The COVID-19 pandemic has drastically altered this outlook," the report said, and added the global economy is expected to slump into recession in 2020, as post-COVID projections indicate.
The RBI further said the sharp reduction in international crude oil prices, if sustained, could improve the country's terms of trade, but the gain from this channel is not expected to offset the drag from the shutdown and loss of external demand.
"COVID-19, the accompanying lockdowns and the expected contraction in global output in 2020 weigh heavily on the growth outlook. The actual outturn would depend upon the speed with which the outbreak is contained and economic activity returns to normalcy.
"Significant monetary and liquidity measures taken by the RBI and fiscal measures by the government would mitigate the adverse impact on domestic demand and help spur economic activity once normalcy is restored," it said.
Risks around the inflation projections appear balanced at this juncture and the tentative outlook is benign relative to recent history. "But COVID-19 hangs over the future, like a spectre," the RBI said.
The report further said it did not provide any growth forecast for GDP, as the situation is highly fluid and "incoming data produce shifts in the outlook for growth on a daily basis." The global macroeconomic outlook is overcast with the COVID-19 pandemic, with massive dislocations in global production, supply chains, trade and tourism, it said, adding the financial markets across the world are experiencing extreme volatility; global commodity prices, especially of crude oil, have declined sharply.
"COVID-19 would impact economic activity in India directly due to lockdowns, and through second round effects operating through global trade and growth," the RBI said.
The report also said the impact of COVID-19 on inflation is ambiguous, with a possible decline in food prices likely to be offset by potential cost-push increases in prices of non-food items due to supply disruptions.