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How Will the Second Wave of COVID -19 affect Economy

The sharp surge in the number of Covid-19 cases spooked financial markets. Benchmark indices are in a tizzy as the new set of lockdowns were announced by states like Maharashtra and Delhi.

Regardless of short-term market conditions, let's look at two crucial impact points to consider from the second wave of Covid-19 - Inflation and Growth.

Inflation

Inflation is an enemy of your investments. Whenever a crisis hits an economy, inflation often raises the head up.

In the April 2021 monetary policy, the RBI's monetary policy projects the consumer price inflation or the retail inflation at 5.2% over the next six months. That is within the desirable band of 4% to 6% set by the government and the RBI. 

The RBI is confident that it has adequate tools to keep the inflation demon at bay. The committee that sets key borrowing rates continues to project an 'accommodative' monetary policy stance to support economic growth.

Despite that confidence, the inflation outlook could remain clouded until the surge in infections is brought under control and issues concerning lockdowns relax.

This brings us to the second significant aspect outlined by the RBI — economic growth.

Economic Growth

For companies to do well, the economy has to show growth each year.

With consumer confidence dipping due to the second wave of infections, they may appear some uncertainty on growth.

A combination of inflation and slow economic growth could affect some industries and sectors, which could cause stock market volatility. But this year, we have only seen regional lockdowns, unlike last year. Also, as the vaccination drive rolls out, investor optimism may flow back once again.

But here's some good news.

Regarding economic growth, the RBI has projected GDP growth at 10.5% in FY2021-22, thanks to an increase in rural and urban demand. There has also been record agriculture production for 2020-2021 and, with the ongoing vaccination drive, economic activity is likely to normalize soon. The 'accommodative' RBI monetary policy stance means that the benchmark repo rate, which is the rate at which RBI lends short-term funds to banks, stays at 4% and will continue to encourage economic recovery.

India appears to be better prepared to meet the challenges this year. And as the government focuses on containing the spread of the virus, equal emphasis is on reviving the economy.

Regardless of the current second wave and a challenging Financial Year 2020-21, the Indian economy is far more resilient, self-reliant and forward-looking for the days ahead.

While some businesses have been upended, the crisis has also thrown up numerous opportunities for industries such as the healthcare sector, pharmaceutical industry, technology and education stocks. You may want to read our latest research updates on how you could invest for your future and find new opportunities to build wealth.

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