(ATF) The newly-formed monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Friday said that the worst may be over for the economy as it heads for a steady recovery towards pre-pandemic growth rates.
But the body also warned that India’s GDP for the financial year ending in March could still contract 9.5% with “risks tilted to the downside.”
Consequently, the MPC decided to keep its benchmark lending (the repo) rate unchanged at 4%, signalling that the central bank is still focused on keeping inflation under control, and that there is scope of another interest rate cut soon after.
According to RBI’s new forecasts, headline inflation is expected to remain at an average of 4.3% until March 2022.
READ MORE: India’s Reserve Bank holds rates amid hazy outlook
The country’s economy has decisively managed to fight the pandemic and “silver linings are visible in flattening of active Covid-19 cases across the country”, Governor Shaktikanta Das said on Friday.
With “deep contractions” of April-June now behind, “the mood of the nation has shifted from despair to confidence and hope”, the RBI chief said while addressing the media, adding that high-frequency indicators suggest stabilisation of economic activity in May to June after the 23.9% year-on-year decline in real GDP in April to June.
The RBI also said that cushioned by government spending and rural demand, manufacturing – especially consumer non-durables – and some categories of services, such as passenger vehicles and railway freight, have gradually recovered in the second quarter (Apr-Jun), while the outlook for agriculture is robust.
Contraction imminent
However, commenting on the growth outlook, the RBI noted that while the recovery in the rural economy is expected to strengthen further, a turnaround in urban demand is likely to be lagged owing to the strict social distancing norms and the elevated number of COVID-19 infections.
Besides, “both private investment and exports are likely to be subdued, especially as external demand is still anaemic,” the RBI said. “Taking into consideration the above factors and the uncertain COVID-19 trajectory, real GDP growth in 2020-21 is expected to be negative at 9.5%, with risks tilted to the downside for the next two quarters.”
Taking a leaf from the US Fed’s policy comments, the RBI also reiterated its commitment to an accommodative stance for “as long as necessary” and at least till the end of March 2022.
“This commitment was a recognition that the currently high inflation was largely a manifestation of supply-side disruptions the COVID-19 pandemic has temporarily brought about. In our view, this explicit acknowledgement of the sources of inflation marks a departure from the past when monetary policy had frequently been used to address supply side inflationary pressures,” said a report by ANZ Research.
Most dovish
Nevertheless, to help the economy emerge from the pandemic, the RBI announced a few new and unconventional measures.
For instance, the RBI allowed banks to increase exposure to retail and small borrowers and rationalised risk weightage on home loans, to allow all new home loans risk to link to the value of the property.
“We believe Friday’s policy marks a landmark change from the past, explicitly communicating a long-term commitment on policy accommodation. It can be also be labelled as one of its most dovish,” said ANZ Research.
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