India’s central bank cuts key rate, says economy to shrink due to COVID-19 impact

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The Reserve Bank of India (RBI) announced a second cut of the year in its key policy rate to help ease the pain of a country battered by weeks of nationwide lockdown due to the coronavirus pandemic, and said the economy would shrink this year.

RBI Governor Shaktikanta Das said in a video conference on Friday that the Monetary Policy Committee (MPC) had voted to maintain its “accommodative” stance and agreed to reduce the repo rate by another 40 basis points from 4.4 per cent to 4 per cent.

The central bank had earlier cut its repo rate to 4.4 percent and the reverse repo rate to 3.75 percent, as economic activity came to a grinding halt due to the lockdown announced in late March.

“The MPC voted unanimously for a reduction in policy repo rate and for maintaining the accommodative stance of monetary policy as long as it is necessary to revive growth and to mitigate the impact of COVID-19 while ensuring that inflation remains within the target,” Das said.

He said that demand in both urban and rural areas had collapsed since March and that had taken a toll on fiscal revenues. The biggest blow from COVID-19 came from a slump in private consumption with consumer durables production slipping by 33 per cent in the month of March, Das said,

April is likely to be worse since all economic activities were shut.

Read RBI Governor’s full statement here

The central bank, which had held back its views on the economy due to coronavirus-related uncertainties, said the Indian economy was likely to shrink in 2021 due to the national lockdown

“The combined impact of demand compression and supply disruptions will depress economic activity in the first half of the year,” Das said.

“Given all the uncertainties, GDP growth in 2021 is expected to remain in the negative territory with some pick-up in growth impulses being seen in H2 2021 onwards,” he added.

Das also highlighted rising food price pressures from supply disruptions but said the MPC expects inflation to eventually fall below its medium-term target of 4% later in the year.

“If the inflation trajectory evolves as expected, more space will open up to address the risks to growth,” Das said.

Das said agriculture and allied activities had given some hope for the country. India is looking at a record crop of cereals at a time when the critical monsoon, which hit the country’s southern shores early next month, is expected to be normal.

However, he said food prices had risen due to pressures from supply disruption triggered by the lockdown. The food inflation, which had eased from the January peak in February and March, surged to 8.6 per cent in April, as it became difficult to move produce from farms and factories.

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