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RBI Monetary Policy Updates: Repo rate unchanged at 4.0 percent, GDP growth predicted to be negative in FY2

The Reserve Bank of India has decided to keep the policy repo rate unchanged at 4.0 percent.

Aug 6, 2020 15:24 IST
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RBI Monetary Policy Updates: The Reserve Bank of India has decided to keep the policy repo rate unchanged at 4.0 percent. The decision was taken by the six-member Monetary Policy Committee during its meeting on August 6, 2020. 

The Monetary Policy Committee decided unanimously to leave the repo rate unchanged to maintain its "accommodative" stance on policy. The announcement was made by Governor Shaktikanta Das in a virtual address to media. 

The MPC has consequently decided to keep the reverse repo rate under the liquidity adjustment facility (LAF)unchanged at 3.35 percent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 percent.

Significance

The MPC decided to continue its accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target going forward.

7th bi-monthly Monetary Policy: Key Highlights

The global economic activity has remained fragile and in retrenchment in several geographies since May 2020.

While the differently-paced withdrawal of COVID-19 lockdown restrictions in some countries enabled a sequential improvement in high-frequency indicators during May-July, a renewed surge in COVID-19 infections in major economies and threats of a second wave appear to have weakened these early signs of revival. 

The global financial markets have rebounded since end-March 2020 with intermittent pauses, shrugging off the volatility and sharp correction recorded in the first quarter of 2020.8.6

Currency valuation

The currencies of emerging market economies have appreciated in close co-movement, tracking weakening of the US dollar. 

Crude Oil 

The Crude oil prices have remained supported on supply cuts by oil-producing countries (OPEC plus) and improved demand prospects on the gradual easing of lockdown restrictions since May. 

Gold Prices

Gold prices have rallied to an all-time high on August 5 on the back of safe-haven demand. 

Inflation 

In advanced economies, fuel prices and soft aggregate demand have kept inflation subdued. However, in emerging market economies, cost-push pressures arising from supply disruptions and demand revival have shown up in consumer prices in June 2020. Global food prices are also elevated across the board.

The MPC noted that contractions in economic activity have been more severe in the second quarter of 2020 than in the first quarter. 

Recovery Road?

The near-term outlook points to a slow, uneven and hesitant recovery pushed into the second half of the year, with risks steeply slanted to the downside. Among advanced economies, the output in the US and the Euro area underwent a deeper contraction in the second quarter. The emerging market economies (EMEs) are expected to shrink in Q2 as reflected in high-frequency indicators. 

Domestic Economy 

The domestic economic activity had started to recover from the lows of April-May following the uneven re-opening of lockdown in June. Fresh surges of infections, however, forced re-clamping of lockdowns in several cities and states. 

Agriculture 

The agricultural sector has emerged as a bright spot with its prospects having strengthened on the back of good spatial and temporal progress of the southwest monsoon. The total area sown under kharif crops on July 31 was 5.9 per cent higher than the normal area measured by the average over the period 2014-15 to 2018-19. 

Industrial Production

The pace of contraction of industrial production, measured by the index of industrial production (IIP), moderated to (-) 34.7 percent in May from (-) 57.6 percent a month ago, with the easing of lockdowns in different parts of the country. All manufacturing sub-sectors, except pharmaceuticals, remained in negative territory. The output of core industries in June contracted for the fourth successive month though with a considerable moderation. The Reserve Bank’s business assessment index (BAI) for first-quarter hit its lowest mark in the survey’s history.

Inflation outlook

The supply chain disruptions continue to persist, with implications for both food and non-food prices. A more favourable food inflation outlook may emerge when bumper rabi harvest eases prices of cereals, especially if open market sales and public distribution offtake are expanded on the back of significantly higher procurement.

The inflation outlook of non-food categories is, however, filled with uncertainty. Higher domestic taxes on petroleum products have resulted in elevated domestic pump prices.

The volatility in financial markets and rising asset prices also pose upside risks to the outlook. The headline inflation may remain elevated in Q2 of 2020 but moderate in H2. 

Growth Outlook

The recovery in the rural economy is expected to be robust, boosted by the progress in Kharif sowing. The domestic demand is expected to recover gradually from Q2 and to sustain through Q1 of 2021-22. 

Consumer confidence 

The consumer confidence turned more pessimistic in July relative to the preceding round of the Reserve Bank’s survey. The external demand is expected to remain lean due to global recession and contraction in global trade. 

GDP growth 

The real GDP growth in Q2-Q4 is expected to evolve along the lines noted in RBI’s May resolution. For the year 2020-21, as a whole, real GDP growth is expected to be negative. Early containment of the COVID-19 pandemic may impart an upside to the outlook. 

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