RBI prepares measure to resurrect shrinking economy

Reserve Bank of India (RBI) governor Shaktikanta Das, has announced a range of new, unconventional measures to resurrect sagging GDP which is expected to contract 9.5% during the current fiscal year (FY2021).
Contraction in economic growth of the size of Q1 is behind us, believes Das, and a strong rebound following that is likely ahead of us.

This fact can be highlighted by the uptick in manufacturing sector and energy consumption, among others.
And, to sustain growth momentum going ahead RBI is ready with unconventional measures.
These include:
RBI will make real-time gross settlement (RTGS) 24x7x365 from December.
Rationalisation of risk weightage on home loans, meaning all new housing loans risk will be linked only to loan to value.

Ways & Means Advance (WMA) limit for the Centre was kept at Rs 1.25 lakh crore.
On-tap TLTRO for Rs 1 lakh crore at 4% till March 2021 was announced.
Besides, OMO worth Rs 20,000 crore will be conducted next week.
RBI will conduct special and outright bond purchases.
The RBI governor has done everything under his control, except cutting rates, to keep interest rates low through the bonds. The bullish sentiment will remain.
Das said that “market participants should be assured that in keeping with the monetary policy stance announced today, the RBI will maintain comfortable liquidity conditions and will conduct market operations in the form of outright and special open market operations.”

Indian economy is entering a decisive phase in the fight against coronavirus, and, hence, the RBI will maintain an accommodative monetary policy stance for as long as necessary.
RBI’s growth forecast came close on the heels of that of the World Bank, which said India’s growth will plunge by 9.6% in 2020-21, reflecting the impact of the lockdown and the income shock on households and small businesses.
This latest projection is significantly worse than the 3.2% contraction projected in June by the multilateral agency. It shows the pain that Covid has inflicted on India’s economy as the lockdown wrecked business activity and shut businesses down.

Today’s decision to keep the benchmark policy rate unchanged at 4% comes in the backdrop of RBI’s continuing battle with stubbornly high inflation.
Retail inflation, the policy-setting yardstick, has stayed above 6% for quite a few months. It may be noted here that the RBI is tasked with keeping inflation at 4%, with a give-or-take of 2% on either side.
Meanwhile, the inflation is likely to ease to the target level in the fourth quarter of 2020-21.
Interest rates have been reduced by as much as 115 bps this year, but indications in the run-up to the meet were that RBI would likely turn more watchful now in view of the inflation scenario.
Regardless of today’s decision, a hitherto-nascent recovery could get further entrenched with a likely pick-up in consumer spending as the festive season is about to set in.

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