Real GDP likely to decline by 9.5% in FY21: RBI

The Monetary Policy Committee decides to keep repo and reverse repo rates unchanged

Hyderabad: The Reserve Bank of India governor Shaktikanta Das announced that the repo rate and reverse repo rate will remain unchanged and the country’s real GDP in 2021 is likely to decline by 9.5 percent.

The real GDP growth in 2020-21 is expected to be negative at (-) 9.5 percent, with risks tilted to the downside (-) 9.8 per cent in the second quarter of 2020-21; (-) 5.6 percent in the third quarter; and 0.5 per cent in the fourth quarter. Real GDP growth for the first quarter of 2021-22 is placed at 20.6 per cent.

The Monetary Policy Committee (MPC) at its meeting held today decided to continue with the accommodative stance during the current financial year and into the next financial year – to revive growth and mitigate the impact of Covid-19 on the economy. The MPC decided to maintain status quo on the policy rate and await the easing of inflationary pressures to use the space available for supporting growth further.

RBI governor said that these decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

Das said the incoming data point to a recovery in global economic activity in Q3 of 2020 in sequential terms, although downside risks have risen with the renewed surge in infections in many countries. Global trade is expected to be subdued.

The rebound could turn out to be stronger among advanced economies (AEs) than in emerging market economies (EMEs). Soft fuel prices and weak aggregate demand have kept inflation below target in AEs, although in some EMEs, supply disruptions have imparted upward price pressures.

Domestic Economy

On the domestic front, high frequency indicators suggest that economic activity is stabilising in the second quarter of 2020-21 after the 23.9 per cent year-on-year (y-o-y) decline in real GDP in the first quarter (April-June).

Manufacturing – especially consumer non-durables – and some categories of services, such as passenger vehicles and railway freight, have gradually recovered in Q2. The outlook for agriculture is robust. With merchandise exports slowly catching up to pre-Covid levels and some moderation in the pace of contraction of imports, the trade deficit widened marginally sequentially in the second quarter.

Headline CPI inflation increased to 6.7 per cent during July-August 2020 as pressures accentuated across food, fuel and core constituents on account of supply disruptions, higher margins and taxes. One year ahead inflation expectations of households suggest some softening in inflation from three months ahead levels. Selling prices remain muted, reflecting the weak demand conditions.

Domestic financial conditions have eased with systemic liquidity remaining in large surplus. Reserve money increased by 13.5 per cent on a year-on year basis, as on October 2, driven by a surge in currency demand (21.5 per cent). Growth in money supply, however, was contained at 12.2 per cent as on September 25. Banks’ non-food credit growth remains subdued. India’s foreign exchange reserves stood at $545.6 billion on October 2.

Economic Outlook

Pressures on prices of key vegetables like tomatoes, onions and potatoes should also go away by Q3 with kharif arrivals. On the other hand, prices of pulses and oilseeds are likely to remain firm due to elevated import duties. International crude oil prices have traded with a softening bias in September on a weak demand outlook, but domestic pump prices may remain elevated in the absence of any roll back of taxes.

Pricing power of firms remains weak in the face of subdued demand. Covid-19-related supply disruptions, including labour shortages and high transportation costs, could continue to impose cost-push pressures, but these risks are getting mitigated by progressive easing of lockdowns and removal of restrictions on inter-state movements.

Taking into consideration all these factors, CPI inflation is projected at 6.8 per cent for the second quarter of 2020-21, at 5.4-4.5 per cent for the second half of 2020-21 and 4.3 per cent for the first quarter of 2021-22, with risks broadly balanced.

The recovery in the rural economy is expected to strengthen further, while the turnaround in urban demand is likely to be lagged in view of social distancing norms and the elevated number of Covid-19 infections.

While the contact-intensive services sector will take time to regain pre-Covid levels, manufacturing firms expect capacity utilisation to recover in Q3:2020-21 and activity to gain some traction from Q4 onwards. Both private investment and exports are likely to be subdued, especially as external demand is still anaemic.