India’s central bank keeps key rate unchanged amid optimism about economic recovery

2-2-scaled.jpg

The Reserve Bank of India on Friday decided to keep the repo rate unchanged at 4% while pledging to keep its accommodative monetary stance unchanged for as long as necessary to cope with covid’s impact.

The reverse repo rate was also kept at the the current leve of 3.35%.

It noted that tbe global economy remains in a challenging situation with a fresh surge of covid infections in the US and Europe, though progreas in vaccine trials have injected optimism.

World trade rebounded in the third quarter as lockdowns were eased, but it is likely to slow in the fourth quarter as pent-up demand is exhausted, inventory restocking is completed.

It added that trade-related uncertainty is rising with the second wave. CPI inflation has remained muted across major advanced economies (AEs) while it picked up in some emerging market economies  on firming food prices and supply disruptions.

However, highly accommodative monetary policies and positive news on the vaccine have supported financial markets, it added.

The central bank said noted that Indian economic indicators were pointing to a recovery with double digit growth in passenger vehicles and motorcycle sales, railway freight traffic, and electricity consumption in October, although there was moderation in some of these indicators in November.

GDP to shrink by 7.5%

The bank projected India’s real GDP growth at -7.5% in 2020-21 with the third quarter growth seen at  0.1% and fourth quarter at 0.7%.

It noted that the outlook for agriculture has brightened following a  favourable monsoon, with winter crop sowing already up 4% year-on-year due to supportive soil moisture and water reservoir conditions.

The bank highlighted concerns about food inflation which surged to double digits in October across protein-rich items including pulses, edible oils, vegetables and spices on multiple supply shocks. This is expected to ease moderately during the winter, a seasonal phenomenon.

Core inflation — Consumer Price Inflation excluding food and fuel — also picked up from 5.4 % in September to 5.8% in October. 

While cereal prices may continue to soften with the bumper summer crop harvest arrivals and vegetable prices may ease with the winter crop, other food prices are likely to persist at elevated levels.

However, the recovery in rural demand is expected to strengthen further, while urban demand is also gaining momentum as unlocking spurs activity and employment, especially of labour displaced by COVID-19, the bank said. 

“These positive impulses are, however, clouded by a possible rise in infections in some parts of the country, prompting some local containment measures,” the bank added.

At the same time, the recovery rate has crossed 94 per cent and there is considerable optimism on successes in vaccine trials. 

Consumers remain optimistic about the outlook, and business sentiment of manufacturing firms is gradually improving. Fiscal stimulus is increasingly moving beyond being supportive of consumption and liquidity to supporting growth-generating investment,the bank added.

Industry welcomes stance

The Indian industry welcomed the central bank’s policy stance.

“It is heartening to see RBI confirming that it will maintain an accommodative stance till the time necessary for stabilizing growth on a firm footing,” said Sangita Reddy, president of the Federation of Indian Chambers of Commerce and Industry (FICCI).

“While the inflation trajectory has moved up, at this point in time re-energizing growth should get all the attention, she said. 

“There has been a substantial upgrade to the overall growth forecast for the second half of the current fiscal. This is encouraging but given the stress the economy had faced on account of COVID-19, we anticipate that policy support, both from the RBI and the government, will be required well into the next year.” 

Another industry body, the Associated Chambera of Commerce and Industry (ASSOCHAM) urged the bank to adopt a more hawkish position to check inflation.

“The pro-active stance of the government to tackle the supply side issues would be instrumental in reducing the food prices further. As the numbers show that the economy is recuperating at a quicker pace than anticipated is a very good sign,” said Niranjan Hiranandani, president of ASSOCHAM. 

“There are several sectors which are showing an upturn consolidating the fact that the GDP growth numbers would be in positive soon,” he added.

Biman Mukherji is a columnist and consulting editor at Indoasiancommodities.com. He has worked for international news organisations such as Reuters, The Wall Street Journal as well as for newspapers like The Times of India. He can be reached at biman.mukherji@indoasiancommodities.in

Leave a Reply

Your email address will not be published. Required fields are marked *