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RBI Slashes GDP Growth Rate To 9.5% For FY22; Key Interest Rates Unchanged The central bank had earlier projected a GDP growth projection of 10.5 per cent

By Debarghya Sil

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RBI/Twitter
Shaktikanta Das, Governor, Reserve Bank of India

The Reserve Bank of India (RBI) on Friday truncated its estimate for economic growth to 9.5 per cent for 2021-2022 due to the second wave of the pandemic. The central bank had earlier projected the GDP growth projection of 10.5 per cent.

RBI governor Shaktikanta Das said the growth estimation of 9.5 per cent will include 18.5 per cent in Q1 (quarter), 7.9 per cent in Q2, 7.2 per cent in Q3; and 6.6 per cent in Q4 of financial year 2022.

Das in a statement said impulses of growth are still alive and RBI will continue to think and act out of the box while planning for the worst and hoping for the best.

The forecast of a normal south-west monsoon, the resilience of agriculture and the farm economy, the adoption of COVID compatible operational models by businesses, and the gathering momentum of global recovery are forces that can provide tailwinds to revival of domestic economic activity when the second wave abates.

"On the other hand, the spread of COVID-19 infections in rural areas and the dent on urban demand pose downside risks. Ramping up the vaccination drive and bridging the gaps in healthcare infrastructure and vital medical supplies can mitigate the pandemic's devastation," RBI's governor said.

RBI has estimated the inflation rate to be 5.1 per cent during the current fiscal year.

RBI's Monetary Policy Committee has left the repo rate and reverse repo rate untouched, a move expected by experts earlier. Repo rate, the rate at which RBI lends funds to banks is still at 4 per cent whereas reverse repo rate, the rate at which central bank borrows money from banks is kept at 3.35 per cent. This is the sixth time that the MPC has maintained the status quo.

Commenting on unchanged interest rates, Viral Sheth, finance controller, Moneyboxx Finance Ltd, a BSE-listed NBFC, said, "Status quo on policy rates maintained by the RBI is on the expected lines given inflation risk and already high liquidity in the banking system. The on-tap liquidity to the tune of INR 15,000 crore announced for contact-intensive sectors including private bus operators, car repair services, beauty parlours, saloons, event organizers is a welcome relief measure for the economy as these sectors employ a lot of people. The move would also help NBFCs as bulk of their customers are self-employed and working in these contact- sensitive sectors"

Prithviraj Srinivas, chief economist, Axis Capital said that "RBI kept policy rates unchanged as expected and predictably downgraded FY22 GDP growth by 1ppt to 9.5 per cent. The central bank continues to maintain a conservative stance on CPI (5.1% for FY22 vs. 4.9% 3 quarter average previously). To tackle likely pressures on domestic interest rates, the RBI highlighted presence of $600 bn FX reserves as a deterrent ahead of crucial FOMC meeting and gave predictable indications on RBI bond buying program, G-SAP 2.0. In addition, there were other credit facilitation measures for severely impacted high contact services sectors. Overall today's measures and communication by RBI bolster the current accommodative policy stance."

RBI has also decided that another operation under G-SAP 1.0 (government security acquisition programme) for purchase of G-Secs of INR 40,000 crore will be conducted on June 17, 2021. Of this, INR 10,000 crore would constitute purchase of state development loans (SDLs). It has also been decided to undertake G-SAP 2.0 in Q2:2021-22 and conduct secondary market purchase operations of INR 1.20 lakh crore to support the market. Earlier, during the auctions of G-SAP 1.0, RBI observed bid cover rations to be 4.1 and 3.5.

Debarghya Sil

Entrepreneur Staff

Former Correspondent

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