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RBI sees economy shrinking 9.5% this fiscal, announces fresh measures to arrest the downtrend

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In a grim message for the economy, RBI governor Shaktikanta Das said today at the central bank’s monetary policy meet that India’s GDP for FY21 is likely to contract 9.5%.

There may be a strong rebound following that, Das added on a note of cautious optimism.

Contraction in economic growth of the size of Q1 is behind us, he said while emphasising that some silver linings are already visible. To drive his point home, he highlighted the uptick in manufacturing sector and energy consumption, among others.

There, however, were a few hits after the rate cut miss. To help the economy emerge from the grievous blows inflicted by the pandemic, governor Das announced a range of new measures today. These include:

One major announcement was that the RBI will make real-time gross settlement (RTGS) 24x7x365 from December.

It also rationalised risk weightage on home loans, meaning all new housing loans risk will be linked only to loan to value.

Ways & Means Advance (WMA) limit for the Centre was kept at Rs 1.25 lakh crore

On-tap TLTRO for Rs 1 lakh crore at 4% till March 2021 was announced.

Besides, OMO worth Rs 20,000 crore will be conducted next week.

RBI will conduct special and outright bond purchases

Indian economy is entering a decisive phase in the fight against coronavirus, the governor said. In view of this, the RBI will maintain an accommodative monetary policy stance for as long as necessary, he added.

RBI’s growth forecast came close on the heels of that of the World Bank, which said India’s growth will plunge by 9.6% in 2020-21, reflecting the impact of the lockdown and the income shock on households and small businesses.

This projection is significantly lower than the 3.2% contraction projected in June by the multilateral agency. It shows the pain that Covid has inflicted on India’s economy as the lockdown wrecked business activity and shut businesses down.

Today’s decision to keep the benchmark policy rate unchanged at 4% comes in the backdrop of RBI’s continuing battle with stubbornly high inflation.

Retail inflation, the policy-setting yardstick, has stayed above 6% for quite a few months. It may be noted here that the RBI is tasked with keeping inflation at 4%, with a give-or-take of 2 per cent on either side.

At the meeting, Das said inflation is likely to ease to the target level in the fourth quarter of 2020-21.

Ahead of the meeting, there was widespread expectation that sticky inflation would deny RBI the headroom to cut rates, holding borrowing costs at a record low.

Most economists surveyed by financial media had opined that the MPC, in all likelihood, would keep the benchmark repurchase rate unchanged.

Three new external members were added to the six-person MPC this week. The three new members — Ashima Goyal, Jayanth Varma and Shashanka Bhide — have a track record of backing stimulus — both monetary and fiscal — to boost the economic engine.

Interest rates have been reduced by as much as 115 bps this year, but indications in the run-up to the meet were that RBI would likely turn more watchful now in view of the inflation scenario.

The policy meeting was originally scheduled for October 1, but was postponed after the appointment of the new members got delayed.

Regardless of today’s decision, a hitherto-nascent recovery could get further entrenched with a likely pick-up in consumer spending as the festive season is about to set in.

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