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India central bank projects economy to shrink at 7.5% pace

RBI upgrades negative forecast by 2 percentage points as rural demand picks up

Shaktikanta Das, the Reserve Bank of India governor, projects retail inflation of 6.8% for the October-December quarter and 5.8% for January-March.   © Reuters

NEW DELHI -- India's economy is projected to shrink 7.5% in the current fiscal year through March, its central bank governor said on Friday, upwardly revising an October forecast for a 9.5% contraction.

The economy "is recuperating faster than anticipated," Reserve Bank of India Gov. Shaktikanta Das said after the bank's Monetary Policy Committee meeting. The second half of the ongoing fiscal year "is expected to show positive growth," 0.1% on the year in the October-December quarter and 0.7% in January-March, he added.

Recovering rural demand is expected to strengthen further, while urban demand is gaining momentum as the unwinding of coronavirus-related restrictions "spurs activity and employment, especially for labor displaced by COVID-19," he said. "These positive impulses are, however, clouded by a possible rise in infections in some parts of the country, prompting some local containment measures."

India's gross domestic product fell 7.5% in July-September, the second quarter of the financial year. The downturn, however, eased from an unprecedented 23.9% contraction during the previous three months, when the nation went under a strict lockdown.

The country, which has reported over 9.5 million COVID-19 cases and 139,000 deaths, imposed the nationwide lockdown on March 25. In June, restrictions began to be eased across the country.

Also on Friday, the RBI said it is keeping its key interest rate unchanged at 4%, holding off on lowering the rate for a third policy meeting in a row due to rising retail prices. Between February and May, the RBI slashed rates by 115 basis points in response to the pandemic.

"The MPC decided today to maintain status quo on the policy rate and continue with the accommodative stance as long as necessary -- at least during the current financial year and into the next financial year -- to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward," Das said.

India's retail inflation in October rose to 7.6% from 7.3% in September, breaching the upper limit of the RBI's tolerance band of 4% to 6% for the seventh straight month as food prices remained elevated. The RBI takes this rate into consideration when making policy decisions.

"The outlook for inflation has turned adverse relative to expectations in the last two months," Das said, adding "cost-push pressures continue to impinge on core inflation, which could remain sticky."

He projected retail inflation of 6.8% for the October-December quarter and 5.8% for January-March.

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