GDP likely to contract 9.5% in current fiscal, says RBI

Mumbai: RBI Governor Shaktikanta Das said on Friday that the country's economy is likely to contract 9.5 per cent in the current financial year, "with risks tilted to the downside" while maintaining a status quo on policy rates citing high inflation. The GDP may break out of the Coronavirus-induced contraction and turn positive by the fourth quarter of 2020, Das added. The Monetary Policy Committee — whose three new external members voted in Friday's policy action — unanimously favoured holding the repo rate at the existing 4 per cent, while retaining an "accommodative" stance — which rules out any hikes for the time being.

The central bank had slashed the repo rate by 115 basis points since late March before hitting a pause button in August. To bring down borrowing cost, RBI announced a number of unconventional steps, including doubling of the size of open-market bond purchases to Rs 20,000 crore, offer to buy state debt, and easing a corporate cash crunch through a Rs 1 lakh crore of targeted long-term funds available on tap.

Besides supporting economic activity, the measures are aimed at ensuring the government's record borrowing programme goes through smoothly.

The RBI Governor said the economic growth, which slumped to a negative 23.9 per cent in the April-June quarter, will turn positive only in the final January-March quarter.

"By all indications, the deep contractions of Q1 2020-21 (April-June) are behind us; silver linings are visible in the flattening of the active caseload curve across the country," he said.

Barring the risk of a second wave of infections, the economy appeared poised to begin a recovery, he said, noting food grain production was set for record highs and factories and cities were coming back to life.

With macro indicators pointing to a recovery, "GDP growth may break out of contraction and turn positive by Q4 (January-March)," he said.

"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," he said, adding that if the current momentum of upturn gains ground, a faster and stronger rebound is eminently feasible.

After the sharp contraction in Q1 of FY21, the MPC expects growth to come in at (-)9.8 per cent in Q2, (-)5.6 per cent in Q3 and 0.5 per cent in Q4.

"Against all odds, we shall strive and revive," he said.

In a video live stream, he said RBI will "continue with the accommodative stance of monetary policy as long as necessary at least during the current financial year and into 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".

RBI saw inflation easing close to the targeted range of 4 per cent, plus or minus 2 per cent, in the fourth-quarter ending March.

The Governor noted that the recent pick-up in inflation is due to supply disruption and higher markups during the lockdown. Going forward, as supply chains are restored, inflation could ease to 4.5-5.4 per cent in the second half of FY21. The RBI's optimism on the inflation front is based on easing of supply-side disruption, weak demand conditions and bumper Kharif harvest as it expects the retail inflation to decline to 4.3 per cent in the first quarter of FY22.

In a bid to provide easy liquidity conditions, RBI announced Open Market Operations (OMO) worth Rs 20,000 crore, which will be used for buying Government of India securities.

OMO will also be extended to state development loans. This will ease the state's borrowing programmes amid a lower collection of GST.

The RBI also announced on tap TLTRO (Targeted Long Term Repo Operations) with tenors of up to three years for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate. The scheme will be available up to March 31, 2021.