Mumbai: “I recognise that there exists space for future rate cuts if the inflation evolves in line with our expectations. This space needs to be used judiciously to support recovery in growth,” opined the governor as per the minutes of the Monetary Policy Committee (MPC) released by the Reserve Bank of India (RBI).
The reconstituted MPC, which met from October 7 to 9, had decided to keep the benchmark lending rates unchanged in view of the hardening of retail inflation. Das said after the sharpest contraction in economic activity in the first quarter of 2020-21, a number of high frequency indicators of economic activity for the second quarter suggest a sequential improvement.
“There are, however, downside uncertainties that could put sand in the wheels of this nascent recovery. Primary among them is the risk of a second wave of COVID-19. Private investment activity is likely to be subdued, even as domestic financial conditions have eased significantly,” he said.
External demand is also expected to remain anaemic with sharp contraction in global economic activity and trade. As per RBI, the full year gross domestic product (GDP) is expected to contract by 9.5 per cent with a strong rebound next year.
“On the outlook for inflation, food inflation should moderate going forward on a combination of good kharif harvest and a favourable rabi season,” the Governor said.
As per the RBI’s assessment, headline inflation would moderate in H2 of the current year and further in Q1 of next fiscal year. Inflation remained above the upper tolerance threshold of 6 per cent since June, with signs of aggravation of price pressures. The government has asked RBI to keep inflation at 4 per cent (+, – 2 per cent).
Deputy Governor and MPC member Michael Debabrata Patra noted that India has entered a technical recession in the first half of the year for the first time in its history.
