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RBI says GDP will contract by 9.5% in FY21, holds repo rate at 4% amid modest recovery

Barring a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with its pre-Covid growth trajectory, says RBI Governor Das.

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Mumbai: The Reserve Bank of India (RBI) projected 9.5 per cent contraction in India’s GDP for the current financial year in the third bimonthly monetary policy review announced Friday. It also expects headline retail inflation to ease from the current levels in the third and fourth quarters.

The six-member monetary policy committee (MPC) of the central bank held the repo rate at 4 per cent amid confidence that the modest recovery experienced in September could strengthen in the second half of the current fiscal.

The MPC voted unanimously to keep the policy repo rate unchanged at 4 per cent. It also decided to continue with the accommodative stance of monetary policy, RBI Governor Shaktikanta Das said.

“MPC also decided to continue with the accommodative stance of monetary policy as long as necessary at least through 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 inflation remain within the target going forward,” he said.

Except new external member Jayanth Varma, all the members voted on extended accommodative stance formulation.

Das said the GDP growth may break out of contraction and turn positive in the fourth quarter.

The central bank projected GDP contraction of 5.6 per cent in the third quarter and 0.5 per cent growth in the fourth quarter. Real GDP growth for the first quarter of the next fiscal is seen at 20.6 per cent.

Sounding optimistic about recovery prospects, Das said the Indian economy is entering into a decisive phase in the fight against the pandemic. “Relative to pre-COVID levels, several high frequency indicators are pointing to the easing of contractions in various sectors of the economy and the emergence of impulses of growth,” he said.

“By all indications, the deep contractions of Q1:2020-21 are behind us; silver linings are visible in the flattening of the active caseload curve across the country. Barring the incidence of a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with its pre-COVID growth trajectory,” Das added.

This is the first time the central bank has projected GDP and inflation figures since the nationwide lockdown was imposed in March to curb the spread of the novel coronavirus pandemic.

While RBI had refrained from giving specific numbers on growth, it expected the GDP to be in the negative territory for FY21. The 23.9 per cent GDP growth contraction in the first quarter of this fiscal prompted rating agencies and other forecasters to project double digit growth contraction for the entire year.

Also read: India’s GDP expected to contract by 9.6% this fiscal year, says World Bank report


Das said the central bank has decided to look through the spike in inflation as transient. It expects retail inflation to ease in the third and fourth quarter.

“Our projections indicate that inflation would ease closer to the target by Q4:2020-21.”

Average consumer price index (CPI)-based inflation was over 6 per cent for the January-March and April-June quarter. In July, CPI inflation was 6.73 per cent and 6.69 per cent in August. September inflation data, which will be released next week, is also expected to stay above 6 per cent.

The RBI Act mandates the central bank to provide an explanation to the lawmakers if it fails to keep average inflation in the 2-6 per cent range for three consecutive quarters.

While the status quo is on expected lines as inflation was above the central bank’s target range, the extremely dovish stance cheered bond street with the yield on the 10-year government bond falling by 9 basis points in intraday trade.

Also read: RBI’s new MPC should focus on transmission. Without that, more rate cuts can be pointless

‘Whatever it takes’

In his comments, Das said, “In this environment, the focus must now shift from containment to revival. Undeterred by the pandemic, the rural economy looks resilient. Kharif sowing has already surpassed last year’s acreage as well as the normal sown area.”

He said early estimates suggest food grains production is set to cross another record in 2020-21. He also said job creation under the Mahatma Gandhi National Rural Employment Guarantee Act has provided incomes and employment in rural areas.

Das added that the mood of the nation has changed from despair to confidence and hope.

“Meanwhile, migrant labour is returning to work in urban areas, and factories and construction activity are coming back to life. This is also reflected in rising levels of energy consumption and population mobility. In cities, traffic intensity is rising rapidly; online commerce is booming; and people are getting back to offices,” he said.

According to Das, recovery is likely to predominantly be a three-speed, with individual sectors showing varying paces, depending on sector-specific realities.

With the Indian Premier League (IPL) ongoing in the UAE, the RBI governor used cricketing terminology to describe how recovery would shape up in some of the sectors.

“Sectors that would ‘open their accounts’ the earliest are expected to be those that have shown resilience in the face of the pandemic and are also labour-intensive,” he said, citing example of agriculture and allied activities, fast moving consumer goods, two wheelers, passenger vehicles and tractors, drugs and pharmaceuticals, and also electricity generation, especially renewables in these categories.

“The second category of sectors to ‘strike form’ would comprise sectors where activity is normalising gradually. The third category of sectors would include the ones which face the ‘slog overs’, but they can rescue the innings. These are sectors that are most severely affected by social distancing and are contact-intensive,” he added.

Observing that the highlight of the policy was the signal “whatever it takes” to align risk-free government bond yields with the fundamentals of the economy, HDFC Bank chief economist Abheek Barua said the monetary policy was as “aggressively accommodative as possible without cutting the policy rate”.

“…there is a significant probability of a rate cut in February, if not in December itself as inflation, as we expect, moderates,” Barua said.

Also read: Ambani, Adani, Shiv Nadar, Hindujas — Here is the full list of Forbes 100 richest Indians

Stocks fire up

Equity indices rose due to the dovish tone of policy, which noted that the accommodative stance could be extended into the next fiscal with indications that the worst may be over for the economy.

Stocks of financial sectors entities, including housing finance companies, jumped as steps were announced to provide a boost to the real estate sector.

Risk weights on home loans were rationalised by linking them only with loan to value (LTV) ratios for all new housing loans sanctioned up to 31 March 2022.

“Such loans shall attract a risk weight of 35 per cent where LTV is less than or equal to 80 per cent, and a risk weight of 50 per cent where LTV is more than 80 per cent but less than or equal to 90 percent. This measure is expected to give a fillip to bank lending to the real estate sector,” the RBI said.

According to bankers, the move will provide a boost to the high value housing loan where lenders can assign a lower risk weight, which means less capital requirement, for even high value loans if the borrowers put in more funds and opt for a lower loan amount.

Shares of HDFC, the country’s largest mortgage lender, were up 2 per cent, while stocks like LIC Housing Finance and PNB Housing Finance were up 7 per cent and 3.65 per cent, respectively.

TLTRO move

In a move to boost lending, the banking regulator also opened on tap targeted long-term repo operations (TLTRO) 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 31 March 2021.

What’s more important is that for the first time, banks will be allowed to extend loans from these funds which are made available to them by RBI at a low cost.

Until now, banks were only allowed to invest in instruments like commercial paper and corporate bonds. Not so high-rated non-banking financial companies, which so far were deprived of bank funds, now expect the situation to reverse.

“Aligning risk-weights for individual housing loans to Loan to Value (LTVs) will help home lenders, in turn, also driving demand for the stressed real-estate sector. Macro outlook for FY21 looks muted with a decline forecast in GDP by 9.5%, but buoyancy in rural demand and sector specific improvement could lead to a gradual recovery,” said Naveen Kulkarni, Chief Investment Officer, Axis Securities.

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