The Reserve Bank of India has cut its growth forecast for the Indian economy by 100 basis points for the ongoing financial year ending March 2022 (FY22)- from 10.5% previously to 9.5%, thus accounting for the damage caused due to the second wave of the ongoing pandemic, specifically in April and May.
One basis point is a hundredth of a percentage point.
Though the pandemic has led to loss of life and regional lockdown-led restriction, economic activity did not collapse as brutally as observed during the first wave, said Governor Shaktikanta Das.
Further, the RBI has forecast that the Indian economy will witness 5.1% consumer price inflation (CPI) this financial year. In April, inflation was at 4.3%.
Das was giving his address on the decisions and outlook of the Monetary Policy Committee (MPC), which meets every two months.
Here are five things you need to know.
1. 100 bps growth forecast cut
The economy will grow one percentage point less than its earlier forecast this year, with the RBI cutting it from 10.5% to 9.5%.
In the first quarter, the economy will grow 18.5%, 7.9% in the second quarter, 7.2% in the third quarter and 6.6% in the fourth quarter, according to the RBI.
To spell out the stance of the MPC while taking this decision, Das cited several counteracting factors. Though the lockdowns led to manufacturing, industry and high-frequency mobility indicators to moderate, the positives are the expectation of a normal monsoon (that influences rural demand), the vaccination drive picking up pace and external demand getting more robust that is supporting India's export sector.
2. Rates kept unchanged
The MPC voted unanimously to keep the status quo with respect to the policy repo rate at 4%. The MPC also voted unanimously to keep its 'accommodative' stance for as long as needed.
- The marginal standing facility and bank rate remain unchanged at 4.25%
- The reverse repo rate also remains unchanged at 3.35%
The repo rate is the rate at which the RBI lends to commercial banks on a short term basis.
The reverse repo rate is the rate at which banks lend to the RBI, again on a short term basis
3. Inflation moderated
CPI inflation - the price rise of a basket of goods typically consumed by a set of households - is expected to rise 5.1% this year.
Inflation would be within the consumer targeting upper bound of 6%.
In the first quarter of the year, CPI inflation would be at 5.2%; 5.4% in the second quarter, 4.7% in the third quarter and 5.3% in the fourth quarter.
4. A new on tap-window for contact-intensive sectors
The RBI also announced fresh lending support for contact-intensive sectors through a liquidity window of ₹15,000 crores, with a tenor of up to three years at the repo rate.
This window is to act as an incentive to banks to lend to hospitality, tourism, hotels, restaurants, salons, adventure/heritage facilities, car repair, aviation support services, bus operators, spas and event and conference organisers.
Banks are supposed to keep a separate loan-book for such lending, and would be permitted to park their surplus liquidity similar to it parked with the RBI under this window at a rate 25 bps lower than the repo rate (or 40 bps higher that the reverse repo rate).
A similar window was announced for health, vaccine, oxygen and medical and similar supporting industries by the RBI in an unscheduled address by Das last month.
5. NACH to operate all days of the week
The National Automated Clearing House [NACH], which currently operates only on bank operating days, will operate on all days of the week come August 1, said Das. This is to leverage the round-the-clock availability of Real-Time-Gross Settlement (RTGS).
NACH is operated by the National Payment Corporation of India, and is responsible for facilitating credit transfer such as salaries, interest, dividends, pensions etc., and is also used to settle utility bills, premiums and loan repayments. NACH also played a pivotal role in settling direct benefit transfers during the pandemic.
This is the latest step of the RBI to facilitate all round availability of payments services, after making NEFT and RTGS 24x7 recently.
Read Das' full address here.