RBI says economy to contract at 7.5% for FY21; keeps repo rate unchanged at 4% in accommodative stance

The central bank, which had previously expected the economy to shrink 9.5 percent in the year to March, revised its forecast after a shallower-than-expected decline in GDP in the July-September quarter

Press Trust of India December 04, 2020 13:06:14 IST
RBI says economy to contract at 7.5% for FY21; keeps repo rate unchanged at 4% in accommodative stance

File photo of RBI governor Shaktikanta Das. Reuters

Mumbai: The Reserve Bank of India (RBI) on Friday left interest rates unchanged for a third straight meeting as inflation stayed stubbornly high, and said the economy was recuperating fast and would return to positive growth in the current quarter itself.

The benchmark repurchase rate will be maintained at 4 percent, RBI Governor Shaktikanta Das said.

The six-member Monetary Policy Committee (MPC) retained its accommodative stance, signaling its intentions to cut interest rates whenever the situation eases.

A spike in consumer prices forced RBI to pause after cutting rates by 115 basis points this year.

The central bank, which had previously expected the economy to shrink 9.5 percent in the year to March, revised its forecast after a shallower-than-expected decline in the gross domestic product (GDP) in the July-September quarter.

Das said high frequency indicators point to a recovery gaining traction, with double digit growth in passenger vehicles and motorcycle sales, railway freight traffic, and electricity consumption in October.

The GDP, he said, will grow by 0.1 percent in the October-December quarter and by 0.7 percent in the following three months. Overall, the 2020-21 fiscal will end with a (-) 7.5 percent degrowth.

The economy had contracted by a record 23.9 percent in the April-June quarter and by 7.5 percent in the following three months.

The two successive quarters of contraction pushed the economy into a technical recession. This is the first recession since quarterly records started in 1996.

RBI had previously forecast a 5.6 percent contraction in the quarter through December, followed by a return to growth in the three months to March.

Das said inflation continues to be sticky.

Headline retail inflation at 7.6 percent in October was well above the upper end of the central bank's 2-6 percent target band. For H1 2021-22, RBI projected a growth of 21.9 percent to 6.5 percent.

RBI saw inflation in the fiscal third quarter at 6.8 percent, and easing a bit to 5.8 percent in January-March.

It is projected to be in the range of 5.2 to 4.6 percent in the first half of the 2021-22 fiscal. "Inflation is likely to remain elevated," he said, adding that this constrains the monetary policy at the current juncture from using the space available to act in support of growth.

Stating that RBI was ready to take further measures to ease liquidity, he said the central bank will use various instruments at the appropriate time to ensure ample liquidity is available in the system.

He also announces measures to deepen the corporate bond market and supervisory measures for the shadow banking sector.

RBI raised the limit of contactless card transactions to Rs 5,000 per usage from the current Rs 2,000, with effect from 1 January.

Also, real-time gross settlement systems (RTGS) will be available 24x7 in the next few days, he said.

"The MPC decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward," he said.

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