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Friday, December 04, 2020

‘May take years to regain lost GDP, have space for rate cuts’

According to RBI Deputy Governor Michael Patra, if the projections hold, the level of GDP would have fallen approximately 6 per cent below its pre-Covid level by the end of 2020-21 and it may take years to regain this lost output.

By: ENS Economic Bureau | Mumbai | Updated: October 24, 2020 12:43:16 am
The RBI panel last cut the rate by 40 basis points in the May review and kept rates unchanged in the August policy. (Source: Bloomberg)

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has indicated that it “may take years” to regain the lost GDP output. On the other hand, the RBI panel, according to the minutes released on Friday, has signaled that there’s “space for future rate cuts” if the inflation evolves in line with expectations.

“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,” RBI Governor Shaktikanta Das said. The ongoing transmission of past monetary policy actions would help ease financial conditions further, Das said in the minutes released by the RBI.

According to RBI Deputy Governor Michael Patra, if the projections hold, the level of GDP would have fallen approximately 6 per cent below its pre-Covid level by the end of 2020-21 and it may take years to regain this lost output. “There is also an anecdotal sense that the economy’s potential output has fallen, and the post-Covid growth trajectory will look very different from what has been recorded so far, Patra said.

Expained

Output recovery key

The outlook for growth and inflation for the next 3-4 quarters suggests the need for a policy environment enabling recovery of output. The RBI panel last cut the rate by 40 basis points in the May review and kept rates unchanged in the August policy.

Das said a number of high frequency indicators of economic activity for the September quarter of 2020-21 indicated a sequential improvement. The recovery in all likelihood would be led by rural demand, he said.

Shashanka Bhide, Member of the MPC, said there are clearly uncertainties facing the growth and inflation projections. “Towards the end of Q2, there are indications of revival of the economy after the relaxation of restrictions on transportation and businesses across the country. As supply chains adapt to the new conditions, recovery is expected to be stronger and sustained,” Bhide said.

The outlook for growth and inflation for the next 3-4 quarters suggests the need for a policy environment enabling recovery of output, he said.

Meanwhile, the RBI’s central board on Friday held a meeting to discuss, among other things, the economic situation and other challenges. The meeting, which was held through video conferencing, also deliberated on the issues concerning financial stability in the present context.

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