“Faster Recovery Than Expected”: RBI Ups GDP Forecast From -9.5% To -7.5%

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The Reserve Bank of India’s Monetary Policy Committee today left the key lending rate unchanged at 4 per cent as expected, but said it will ensure ample liquidity for stressed sectors to keep a nascent economic recovery on track. The decision comes at a time when the country has entered technical recession amid high levels of inflation as it struggles against the coronavirus pandemic. This marks a third straight policy review with no change in key lending rates, after the RBI brought down the repo rate to 4 per cent — the lowest since 2000 — following an out-of-cycle review in May.

  1. The central bank maintained an “accommodative” policy stance, implying possible rate cuts in future to support the economy, which has been impacted by the coronavirus pandemic. The MPC voted unanimously to keep the interest rates unchanged and continue with its accommodative stance.
  2. Since May, the repo rate — the key interest rate at which the RBI lends money to commercial banks — has been kept steady at a 19-year low of 4 per cent. Currently, the reverse repo rate — the rate at which the RBI borrows from banks — is at 3.35 per cent.
  3. The RBI will continue with its stance at least for the current financial year and into the next year to revive growth on a durable basis, Governor Shaktikanta Das said.
  4. The RBI revised its projection for real GDP growth at -7.5 per cent in financial year 2020-21, from -9.5 per cent. “The second half (of 2020-21) is expected to show some positive growth,” the RBI chief said in an online briefing. 
  5. The latest economic projections confirmed the government’s view that the economy is in a V-shaped recovery, with the GDP contraction easing to 7.5 per cent in the July-September period from a record 23.9 per cent in the previous quarter.
  6. Mr Das said the economy is rebounding faster than expected from a coronavirus-induced slump earlier in the year, but warned signs of recovery were far from being broad based.
  7. He, however, pointed out that inflation is likely to remain elevated, which “constrains monetary policy at the current juncture from using the space available to act in support of growth”. The RBI has already cut the repo rate by 115 basis points since late March to cushion the shock from the coronavirus crisis and sweeping lockdowns to curb infections.
  8. Inflation has remained consistently above the upper end of RBI’s mandated 2-6 per cent target range every month barring March this year, while core inflation has also remained sticky.
  9. The RBI Governor announced measures to help improve access to funding for stressed sectors and said the central bank will take further steps, when necessary, to ensure ample rupee liquidity to sustain visible growth impulses.
  10. Analysts polled by news agency Reuters last month expect the country to emerge from recession early in 2021, but it is not expected to return to pre-pandemic levels any time soon.