Macroeconomic Impact of the Supply Shock during COVID-19 Pandemic in India

The study focuses on examining the impact of the COVID-19 supply shock on the Indian macroeconomic variables. Time Varying Factor Augmented Vector Auto Regressive Model (TVP-FAVAR) has been employed for the econometric analysis. We found that with supply shock, retail food inflation outpaced in COVID times. Production levels reported by IIP fell to abysmally low levels in the post-COVID times, when the economy stalled. The liquidity stimulus provided by the central bank led to the negative response of policy rates to the supply shocks during the COVID times. The paper suggests the central bank to focus on sector-specific liquidity injections and take appropriate steps to evacuate fluctuating generic liquidity in the Indian economic system. This will reduce food inflation and help small non-food related industries to bounce back.