The Reserve Bank of India’s (RBI) monetary policy committee voted unanimously to keep key interest rates unchanged but the central bank unleashed steps to reduce borrowing costs by making it cheaper for banks to provide high-value home loans and announced a £10 billion liquidity infusion.
Governor Shaktikanta Das made it clear that he was prioritising growth, asserting that the economy will bounce back to positive territory in the fourth quarter with 0.5% growth but overall for the current financial year GDP will still decline by 9.5%. RBI’s assessment on growth is in line with most agencies and economists and is closer to the World Bank’s estimate of a 9.6% contraction for 2020-21.
“Indian economy is entering into a decisive phase in the fight against the pandemic. Relative to pre-Covid levels, several high-frequency indicators are pointing to easing of contractions in various sectors of the economy and emergence of impulses of growth,” Das said. “By all indications, the deep contractions of Q1/2020-21 are behind us, silver linings are visible in flattening of the active case load curve across the country. Barring the incidence of a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with pre-Covid growth trajectory.”
Announcing its decision to hold rates, the MPC said that it will look through the current high inflation. “While inflation has been above the tolerance band for several months, the MPC judges that the underlying factors are essentially supply shocks, which should dissipate over the ensuing months as the economy unlocks, supply chains are restored, and activity normalises,” RBI said in its statement.
Going ahead, prices are expected to ease in the fourth quarter. “Consumer price index inflation is projected at 6.8% for Q2/2020-21, at 5.4-4.5% for H2/ 2020-21 and 4.3% for Q1/2021-22, with risks broadly balanced,” according to the statement. On growth, the MPC said GDP in 2020-21is expected to contract at (-)9.5%, with risks tilted to the downside - (-)9.8% in Q2/2020-21, (-)5.6% in the third quarter, and 0.5% in the fourth quarter. GDP growth for the first quarter of 2021-22 is placed at 20.6%.
The governor said the central bank would continue to retain its accommodative policy for the whole of 2020-21 and well into 2021-22. According to bankers, despite the 9.5% decline forecast by the governor, RBI has given an overall positive outlook.
