RBI sees 7.5% GDP contraction for FY21 but expects inflation to remain elevated till March
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- The Monetary Policy Committee (MPC) has decided to keep the monetary policy rates unchanged.
- It has projected that India’s GDP is likely to contract by 7.5% in the current fiscal with positive growth set to kick in in the second half for the next fiscal.
- When it comes to inflation, Reserve Bank of India (RBI) governor Shaktikanta Das believes it is likely to remain elevated in the winter months while indicating that there is a small window available right now to break the inflation spiral.
“The policy will continue with its accommodative stance until at least the end of the current fiscal year and continuing into next year,” said RBI governor Shaktikanta Das during the press conference announcing that the MPC is maintaining its status quo on the policy rates. This means that the repo rate will remain at 4% and the reverse repo rate will continue at 3.35%.
Relief may be on the cards for India’s economic growth, but inflation is likely to remain high, according to Das. Prices of perishables and the arrival of kharif crops may ease some of the pressure, but the prices of other food items are likely to remain inflated.
AdvertisementRBI’s GDP projection compared to analysts’ expectations:
Source: Research reports
|Brokerage||India GDP forecast for FY21|
|Bank of Baroda||-8.2%|
India’s economic growth
The Indian economy first shrank by a massive 23.9% in the March quarter when the nationwide lockdown to prevent the spread of COVID-19 left many industries dead in the water.
In the next quarter, it recovered but overall, the GDP still shrank by 7.5%. And, two consecutive quarters of contraction indicates a technical recession. In its October policy review, the RBI had predicted growth to contract by 9.5% in the current fiscal.
Many experts, including Raghuram Rajan, have sounded a warning on the sharp rebound in the second quarter GDP. Rajan had cautioned that it could be too early to celebrate since a lot of the recovery was due to pent-up demand and may not sustain in the long term.
The RBI is hopeful that the same trend won’t continue in the third quarter. It projects that India’s GDP will be just over the line with 0.1% growth at the end of December and hopefully accelerate further to another 0.7% by March.
Inflation in India
“Cost-push pressure continues to infringe on core inflation, which could remain sticky,” said Das.
In October, retail inflation stood at 7.61% — the highest in six years and above the tolerance range of between 2% to 6%. The month before that inflation was at 7.3%.
The MPC believes that there is only a small window available for ‘proactive’ supply management strategies to break the inflation spiral being fueled by supply chain disruptions, excessive margins and indirect taxes.
|Period||Inflation outlook (CPI)|
|H1 FY22||4.6 - 5.2%|
Advertisement“Further efforts are necessary to mitigate supply-side driven inflation pressures,” said Das.
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