RBI upgrades GDP forecast, expects economy to shrink 7.5% this fiscal

The Reserve Bank expects GDP to contract 7.5% this fiscal, said central bank chief Shaktikanta Das while announcing monetary policy committee decision to keep interest rate unchanged. This is an upgrade from the central bank’s earlier forecast of 9.5% contraction in its October review. The economy is recuperating faster than anticipated, the RBI chief said, adding that the recovery in rural demand is expected to strengthen further while recovery is urban demand is gaining momentum.

The RBI projected inflation at 6.8% for Q3 of this fiscal.

The Sensex today hit 45,000 for first time as markets hit new highs.

“Status quo in policy rates and policy stance are on expected lines. The central bank has reiterated that it will use appropriate policy instruments to ensure ample liquidity to support growth. The revision of FY 21 GDP growth rate to -7.5% is positive. RBI’s projection of GDP growth to be positive for H2 is in line with market’s optimism. Emphasising the multi-speed upturn in economy, the central bank has announced the extension of on tap TLTRO to stressed sectors. There is no market moving announcement in the policy, but the overall tone is positive,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Corporate bond spreads have come down to pre-pandemic levels and will help in economic recovery, RBI chief Shaktikanta Das said. He reiterated that the RBI will use all tools at its disposal to maintain enough liquidity in the financial system.

Recent data showed September quarter gross domestic product contracted 7.5% on year compared to a decline of 23.9% in the previous three months, when the impact of the coronavirus pandemic was more pronounced.

The RBI today kept key interest rates steady as widely expected on Friday amid persistently high inflation, and after a better-than-expected reading on economic growth.

The monetary policy committee also decided to retain an accommodative policy stance at least for the current financial year and into the next year to revive growth on a durable basis.

The key lending rate of the RBI or the repo rate was left unchanged at 4% while the reverse repo rate or the key borrowing rate stayed at 3.35%. RBI has so far this year slashed the repo rate by 115 basis points to cushion the shock from the coronavirus crisis.

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