22nd October 2020

Confidant Classes

A Premier Judicial Service Coaching

Reserve Bank of India’s MPC updated

During the bi monthly monetary policy presentation, the Reserve Bank of India’s Monetary Policy Committee (MPC) said on Friday that a faster and stronger rebound in the economy was “eminently feasible” if the momentum the current recovery it is gaining ground.

  • MPC, which has kept key interest rates unchanged, said that real GDP is expected to grow 20.6% in the first quarter of 2021-2022.

GDP stimulus

  • Projecting negative (-) growth of 9.5 percent of real GDP in 2020-2021, RBI Governor Shaktikanta Das said; “The deep contraction in the June 2020-2021 quarter was left behind us; Rays of light are visible in the flattening of the active workload curve across the country.
  • The policy panel said that real GDP growth in 2020-2021 is expected to be negative at (-) 9.8% in the second quarter of 2020-2021, (-) 5.6% in the third quarter and 0.5% in the fourth quarter.
  • “Real GDP growth for the first quarter of 2021-22 is set at 20.6%”, the panel said.
  • According to Das, the MPC has decided to view the current rise in inflation as transitory and to address the most urgent need to revive growth and mitigate the impact of Covid. GDP fell 23.9% in the June quarter.

Inflation on the verge of falling

  • RBI projections indicate that inflation will approach the target in the fourth quarter of 2020-2021.
  • In the September 2020 RBI survey cycle, households expect inflation to decline slightly over the next three months, a hopeful sign that supply chains will rebound.
  • Retail trade inflation is projected at 6.8% for the second quarter of 2020-2021, 5.4-4.5% for the first six months of 2020-2021 and 4.3% for the first quarter of 2021-2022, the RBI said.
  • The MPC’s assessment is that inflation will remain high in September printing, but will gradually decline towards the target in the third and fourth quarters.
  • Our analysis suggests that supply disruptions and associated spreads / margins are the main drivers of inflation. As supply chains are re-established, those gaps should dissipate, he said.

On the recovery

  • Das said the economy is likely to experience a three-speed recovery, with individual sectors showing variable rates, depending on the specific realities of the sector.
  • The sectors that “open their accounts” first should be those that have been resilient to the pandemic and are also labor intensive.
  • Agriculture and related activities; fast moving consumer goods; two-wheelers, passenger cars and tractors; drugs and pharmaceuticals; and electricity generation, particularly renewable energy, are among the sectors in this category.
  • The second category of “striking” sectors would include those in which activity gradually normalizes. The third category of sectors would include those that face “great efforts” but can save their sleeves.

On the economy

  • The Indian economy is entering a decisive phase in the fight against the pandemic.
  • Compared to pre-Covid levels, several high-frequency indicators point to a slowdown in contractions in various sectors of the economy and the emergence of growth impulses.
  • “Covid-19 has tried and exhausted our resources and our resilience. Our difficulties are not over yet and a further increase in infections remains a serious risk, “said Das.
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