The Reserve Bank of India has, in a first, acknowledged that the economy will contract in the current financial year — something that independent experts had already assessed.
It is in this context that the central bank’s monetary policy committee (MPC) cut the repo rate by 40 basis points (bps) despite a “highly uncertain” outlook on retail inflation. The MPC expected the high inflation rate to be short-lived, expecting it to fall below 4 per cent in the second half of the current financial year. Experts have countered this view.
However, RBI Governor Shaktikanta Das did not give an exact figure for the decline in gross domestic product (GDP). He said he would wait for the release of GDP data for FY20, by the statistics office next week, to make a specific projection.
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The governor expects gradual revival in the economy during the second half, after the possible lifting of the lockdown and fiscal/monetary stimulus. However, this has a downward bias as the governor said much depends on how quickly the Covid curve flattens.
The RBI’s assessment came even as independent experts estimated the economy to contract from 5-7 per cent in FY21. Even on Friday, ICRA further cut its projections for the economic contraction. From the earlier expectation of a 1-2 per cent fall in GDP for FY21, it now expects the decline to be 5 per cent.
“We now expect GDP to report contractions of 25 per cent and 2.1 per cent for Q1 and Q2 of FY21, which implies a recession,” said Aditi Nayar, principal economist, ICRA.
On the assumption that the lockdown will be completely lifted within the first quarter of FY21, Nayar expected a V-shaped recovery.
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“However, if there is a second wave of infections that forces subsequent lockdowns either in India or globally, the ensuing demand uncertainty and supply chain hiccups could result in a W-shaped economic cycle, the inflection points of which can’t be gauged now,” she added.
Only agriculture provides some ray of hope. Das used figures released by the agriculture ministry to say that amid this encircling gloom, agriculture and allied activities have provided a beacon of hope. The third advance estimates pegged food grain production figure at record 295.67 million tonnes for FY20.
In addition, there was forecast of a normal monsoon in 2021 by the India Meteorological Department (IMD).
By May 10, kharif sowing was higher by 44 per cent over last year’s acreage. Rabi procurement was in full flow with respect to oilseeds, pulses, and wheat, benefiting from the bumper harvest, said the RBI.
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“These developments will support farm income, improve terms of trade facing the farm sector, and strengthen food security. Going forward, these will have a salutary effect on food price pressure,” said Das.
Madan Sabnavis, chief economist at CARE Ratings, did not agree with the MPC’s assessment.
He said: “Inflation will remain above 4 per cent — closer to 5 per cent — in the remaining months of FY21,” he said.
According to Sabnavis, while demand in the non-food segment is low, supply has also been disrupted, and hence inflation will be high. On the food side, inflation has not reduced despite good Rabi production, as there is a tendency to recoup earlier losses. This is likely to happen at the time of Kharif crops as well, he said.
The RBI also feared that the high food inflation may persist for a few more months, depending on the extent of the lockdown and restoration of supply chains.
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The consumer price index (CPI) for food and beverages rose to 151.4 in April, from 148.9 in the previous months. However, caution should be exercised in interpreting this number, given many sub-groups such as meat and fish are missing in the April data on account of the lockdown.
The central bank is particularly worried about inflation in pulses, and has urged the government to “reappraise” import duties, besides taking other supply-side measures.
CPI in pulses stood at 150.4 in April, against 141.1. The RBI also wanted the Food Corporation of India (FCI) to offload some of the excess cereal stock to cool prices down and create room for rabi procurement.
(Note: This is a Article Automatically Generated Through Syndication, Here is The Original Source
