RBI leaves rates unchanged as it lowers GDP growth projection to 9.5%, targets 5.1% inflation
- The Monetary Policy Committee (MPC) left rates untouched and maintained its ‘accommodative’ stance on economic recovery today, on June 4.
- It has revised its GDP growth projection for the Indian economy to 9.5% — 100 basis points lower than its earlier estimate of 10.5% in April.
- With its mandate to keep inflation within the 2-6% band, the MPC hopes to keep consumer inflation at 5.1% in 2021-22.
|Types of rate||What they do||Rate|
|Repo rate||The rate at which the RBI lends short-term funds to banks||4%|
|Reverse repo rate||The rate at which banks can park their with the RBI||3.35%|
Reserve Bank of India (RBI) governor, Shaktikanta Das, disclosed that the MPC has revised its gross domestic product (GDP) projection for the ongoing financial year from 10.5% to 9.5% — lower by 100 basis points or 1%.
This is after India’s economy contracted by a massive 7.3% in the previous financial year
|Time frame||Expected growth in India’s GDP for 2021-22|
The forecast of a normal south west monsoon, the resilience of agriculture, the adoption of COVID compatible operational models by businesses, and the gathering momentum of global recovery are tailwinds that the MPC is hoping will lead to the revival of domestic economic activity once the second wave of COVID-19 abates.
Unlike the first wave where the economy came to standstill under a national wide lockdown, the impact on economic activity is expected to be relatively contained in the second wave with restrictions on mobility being regionalised and nuanced.
Inflation is likely to remain elevated at 5.1%
The MPC’s mandate is to keep inflation within the prescribed limits of 2% to 6%. And, for the ongoing financial year, it expected the increase in prices to remain within 5.1%.
|Time frame||Expected consumer price inflation (CPI) for 2021-22|
The Consumer Price Index (CPI) was slightly lower in April at 4.2% — compared to 5.52% in March — but the onset of lockdowns and surge in COVID-19 cases has created a lot of disruption in the last one month. Nonetheless, Das is hopeful that the downswing will continue with the onset of a normal southwest monsoon and the second wave subsiding.
“The favourable base effects that brought about the moderation in headline inflation by 1.2% in April may persist through the first half of the year conditioned by progress in monsoon and effective supply side interventions by the government.”
However, rising crude oil prices leading to a broad based surge in commodity prices and logistics costs, could worsen cost conditions. According to Das, weak demand conditions may temper the impact, and the pass through to consumer inflation.
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