"Both private investment and exports are likely to be subdued, especially as external demand is still anemic. For the year 2020-21 as a whole, therefore, real GDP (gross domestic product) is expected to decline by 9.5 percent, with risks tilted to the downside," the governor of the Reserve Bank of India (RBI) said at the end of the three-day newly constituted monetary policy committee meeting.
However, despite the grim economic scenario, RBI kept its repo rate unchanged at 4 percent for the second consecutive time and continued with its accommodative stance.
The central bank guidance comes a day after the World Bank in its update said that the Indian economy was expected to contract by 9.6 percent in 2020-21 due to weak economic activity and depressing imports and exports following the COVID-19 pandemic-led lockdown impact after growing at 4.2 percent in 2019-20.
"The decision to remain accommodative for an extended period and to look through 'transient humps' in inflation reveals an appreciation for the basic principles of economics - that a GDP contraction of 9.5 percent is simply not compatible with demand side inflation pressures," said Abheek Barua, chief economist at HDFC Bank.
The RBI announced a slew of liquidity measures including the purchase of state development bonds for the first time ever through open market operations as well as the purchase of government securities.
India, with the second largest number of COVID-19 cases after the United States, has been under pandemic-led lock down for a substantial period in the past six months with 893,592 active cases currently and 106,490 deaths so far.
"Relative to pre-COVID levels, several high frequency indicators are pointing to the easing of contractions in various sectors... and the emergence of impulses of growth... By all indications, the deep contractions of Q1 are behind us," Governor Das said on an optimistic note.
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