RBI retains lending rates but gives optimistic outlook

Mumbai : Persistently high inflation fanned in part due to supply side disruptions along with seasonal factors led the Reserve Bank of India to maintain the key lending rates.Accordingly, the Monetary Policy Committee of the central bank in its penult imate meet for 2020, decided to maintain the repo rate — or short-term lend ing — rate for commercial banks, at 4 per cent.Besides, the reverse repo rate stands unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the ‘Bank Rate’ at 4.2 per cent.The MPC voted to maintain accommodative stance, thus opening up possibilities for more future rate cuts.It was broadly expected that the RBI’s MPC might hold rates as recent data showed that retail inflation has been at an elevated level during June.”The MPC evaluated domestic and global macroeconomic and financial condition s and voted unanimously to leave the policy repo rate unchanged at 4 per cen t,” RBI Governor Shaktikanta Das said.”It also decided to continue with the accommodative stance of monetary policy as long as necessary — at least during the current financial year and int o the next year — to revive growth on a durable basis and mitigate the impact of Covid-19, while ensuring that inflation remains within the target going forward.”According to Das, India’s economy is entering into a decisive phase in the fight against the pandemic.He cited that relative to pre-Covid levels, several high frequency indicator s are pointing to the easing of contractions in various sectors of the economy and the emergence of impulses of growth.”By all indications, the deep contractions of Q1:2020-21 are behind us; silver linings are visible in the flattening of the active caseload curve across the country,” Das said.”Barring the incidence of a second wave, India stands poised to shrug off th e deathly grip of the virus and renew its tryst with its pre-Covid growth trajectory.”The governor pointed out that some of “this optimism is being reflected in people’s expectations”.
In the September 2020 round of the RBI’s survey, households expect inflation to decline modestly over the next three months, indicative of hope that supply chains are mending.”Our projections indicate that inflation would ease closer to the target by Q4:2020-21. Our other surveys, also conducted in September, indicate that consumer confidence is turning upbeat on the general economic situation, employment and income over a one year ahead horizon,”.”While the current assessment of the overall business situation remains in contraction in Q2, it has moved up from a low in Q1. Forward-looking business expectations are optimistic on the overall business situation, production, order books, employment, exports and capacity utilisation.”Significantly, the inflation expectations denotes the likely timing of the n ext rate cut as monetary policy is in essence a tool to containing rising prices.Lately, retail inflation has been at an elevated level during July-August.The retail or consumer price index stood at 6.69 per cent in August. It had risen to 6.73 per cent in July.As per the data, retail inflation level has reached the upper limit of the medium-term CPI inflation target of four per cent. The target is set within a band of plus/minus two per cent.On the growth part, he said that country’s real GDP may decline by 9.5 per cent in the financial year 2020-21.”The modest recovery in various high-frequency indicators in September 2020 could strengthen further in the second half of 2020-21 with progressive unlocking of economic activity,” the governor said.”Agriculture and allied 5 activities could well lead the revival by boosting rural demand. Manufacturing firms expect capacity utilisation to recover in Q3:2020-21 and activity to gain some traction from Q3 onwards.”However, he predicted that both private investment and exports are likely to be subdued, especially as external demand is still anaemic.”For the year 2020-21 as a whole, therefore, real GDP is expected to decline by 9.5 per cent, with risks tilted to the downside. If, however, the current momentum of upturn gains ground, a faster and stronger rebound is eminently feasible,” he said.