The Reserve Bank of India (RBI) is done punching numbers. Its official read on the economy — the first since the coronavirus outbreak — shows India’s real GDP growth to first contract 9.5% in FY21, but rebound to score a perfect 10% in FY22. But as uncertainty of the virus spread continues to fog the outlook, all forecasts are pretty much down to the wire.
According to RBI Governor Shaktikanta Das, the disastorous phase is behind us. Meaning, the sudden and steep contraction like 23.9% seen in Q1 is over and growth rates will regain their model behaviour hereon.
The central bank’s projections pursued three scenarios — benign, baseline, and adverse. Taken together, GDP could contract 7.5-11.5% in FY21, but rebound by 7.2-11.6% in FY22. The big cheese is, regardless of the scenario, growth is bound to recover in 2021, though much will depend on investments, consumer spending, monsoon, exports, global growth, and of course some good luck and fortune.
All this is subject to avoiding a second wave of infections, and it’s unclear if RBI modelled such a scenario where the ‘deathly grip of the virus’ invokes future lockdowns or delays re-opening of the economy.
In Q2, growth may shrink 9.8%, followed by an even modest 5.6% contraction in Q3 and eventually recover to 0.5% in Q4. If everything goes by the script, real GDP growth in Q1 of FY22 will be an unprecedented 20.6%. Notwithstanding the overwhelming evidence pointing to recovery, the question on the pace of reboud remains. Will it be a V, U, W, L or K-shaped? Das believes it could be a 3-speed recovery.
First layer includes sectors opening up early like agriculture and allied activities, FMCG goods and auto to an extent. Second includes those where activity is normalising gradually followed by third comprising ‘slog overs,’ or those entities severly affected by social distancing norms. With agriculture outlook remaining robust, it’s expected to boost rural demand and consumption may go up in Q3.
Pvt investment may take longer to stabilise: RBI
Reservrve Bank of India Governor Shaktikanta Das on Friday said manufacturing and some services categories recovered in Q2, and capacity utilisation is expected to gain traction from Q4. Private consumption constituting 55 per cent of GDP is recovering, but is far from gaining broad-based traction. Likewise, pivate investments, already in contraction mode since Q2 FY20 may take longer to stabilize, hamstrung by low capacity utilisation, still subdued bank credit and the global recession.
Meanwhile, the freshly-constituted Monetary Policy Committee kept benchmark rates unchanged as price rise is largely due to supply shocks. Repo rate now stands at 4% and reverse repo at 3.35%. For the first time, MPC gave a forward guidance vowing to maintain an accommodative policy throughout this fiscal and may be next. This clarity of thought cheered markets.
So, even though households expect prices to decline modestly between October and December, RBI’s assessement indicates inflation easing closer to the 4% target only by Q4. I n FY22, assuming a normalisation of supply chains with the availability of effective Covid-19 vaccine, inflation will be range-bound at 4.1-4.4%
MPC keeps key rates unchanged
RBI has kept key interest rates unchanged. The six-member Monetary Policy Committee, with three newly inducted external members, voted unanimously to retain the benchmark repurchase or repo rate at 4% while keeping its policy stance accommodative, implying it could ease again