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Economy is extremely weak: RBI

Economy is extremely weak
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Economy is extremely weak

Highlights

Apex bank keeps key interest rates on hold as inflation worries haunt; surge in fresh infections weighs

Mumbai: The Reserve Bank of India (RBI) on Thursday kept key interest rates unchanged to help tame inflation that in recent times had surged past 6 per cent mark, and said that the economy is in an extremely weak condition following the Covid-19 pandemic.

After cutting interest rates by 115 basis points since February, the Monetary Policy Committee (MPC) after three days of deliberations voted unanimously to leave the policy repo rate unchanged at 4 per cent.

The MPC also decided to "continue with the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of Covid-19 while ensuring that inflation remains within the target" zone, RBI Governor Shaktikanta Das said, while delivering the decision of the MPC on monetary policy.

"Given the uncertainty surrounding the inflation outlook and extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, the MPC decided to keep the policy rate on hold," he added.

Das said the central bank would remain "watchful for a durable reduction in inflation to use the available space to support the revival of the economy." While, economic activity had started to recover from the lows of April-May, a surge in fresh infections have forced re-clamping of lockdowns in several cities and states to "level-off" various high-frequency indicators.

The six-member MPC saw upside risks to food prices and elevated headline inflation during July-September, which would ease in the second half of the 2020-21 fiscal.

The Governor said the Monetary Policy Committee (MPC) was of the view that supply chain disruptions on account of the Covid-19 pandemic persists, with implications for both food and non-food prices.

"A more favourable food inflation outlook may emerge as the 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. Nonetheless, upside risks to food prices remain," Das said.

"The abatement of price pressure in key vegetables is delayed and remains contingent upon normalisation of supplies. Protein-based food items could also emerge as a pressure point," he said.

Keeping interest rates unchanged will help achieve the medium-term target of consumer price index (CPI) inflation of 4 per cent with a band of +/-2 per cent while supporting growth, RBI said.

It forecasts a contraction in real GDP growth for the April 2020 to March 2021 fiscal.

"Real GDP growth in the first half of the year is estimated to remain in the contraction zone. For the year 2020-21 as a whole, real GDP growth is also estimated to be negative," Das said.

Das announced a Rs 10,000 crore additional special liquidity facility for the housing sector and smaller non-bank finance companies (NBFCs). To deal with economic disruptions caused by Covid-19, RBI allowed lenders to implement a resolution plan for corporate loans without change of ownership.

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