RBI Says Economy To Contract 9.5% In FY21, Keeps Rates Unchanged

This is the first numerical estimate from the RBI of Indian economy registering a negative growth this fiscal

The Indian economy will contract 9.5% in the ongoing financial year, said Governor of the Reserve Bank of India Shaktikanta Das in his bi-monthly monetary policy address. This estimate assumes significance as it is the first formal estimate by them, after Das gave an indication of negative growth in the Indian economy in a media address on May 22, and since then stopped short of providing an estimate.

"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," the RBI governor said. His statement also said that economic activity would gain traction from the third quarter of the ongoing financial year, and if the current upward momentum gains ground, it would be possible to witness an even faster and stronger rebound in the economy.

After the economy contracted 23.9% in the first quarter of the ongoing financial year, measured year-on-year, the RBI has projected that the economy will contract 9.8% in the second quarter, 5.6% in the third quarter and will grow 0.5% in the fourth quarter of the year. This can be read in its monetary policy report here.

Previously, BOOM has covered other research houses, banks, and institutions who have estimated that India's FY21 contraction could be as high as 15%.

Here's how the RBI's recent estimates compares to other estimates.

How will India recover?

"There is currently an animated debate about the shape of the recovery. Will it be V, U, L, or W? More recently, there has also been talk of a K-shaped recovery," Das said. In his view, it would be a three-speed recovery with individual sector showing different paces of recovery depending on ongoing sectoral circumstances. Labour intensive industries, that were relatively resilient in the face of the pandemic, would be shooting up at the earliest. These include agriculture (which has also been said by various reports); 'fast moving consumer goods'; two wheeler, passenger vehicles and tractors and electricity generation, especially the renewable energy sector.

The RBI also kept key rates unchanged:

  1. The repo rate, also called the repurchase rate, stays unchanged at 4%. It is the rate at which the RBI lends to banks on a short-term basis.
  2. The reverse repo rate, or the rate at which banks keep their funds with the RBI on a short-term basis, remains at 3.35%
  3. The Marginal Standing Facility and the bank rate stay unchanged at 4.25%

The RBI's overall monetary policy stance will be 'accommodative' throughout the ongoing financial year and going into the next.

Das also announced a slew of regulatory measures, among which one is poised to benefit high-volume banking transactions. 'Real Time Gross Settlement' or 'RTGS', a high-value payments system that is settled by the RBI will be made available round the clock from December 2020. The minimum value to make an RTGS transaction is ₹2 lakhs, and it is currently available from 7AM to 6PM on working days. This step follows the RBI making NEFT payments available 24x7 in December 2019.

"India will be among very few countries globally with a 24x7x365 large value real time payment system", he said.

Das' full address can be found with the RBI here.

Also Read: Why Claims Of US, Canada GDP Falling More Than India Are Misleading

Note: The tabular comparison has been updated on October 14 to reflect the IMF's estimates from the October 2020 edition of it's World Economic Outlook, which can be read here.

Updated On: 2020-12-03T12:57:02+05:30
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