Inflation to stay elevated: RBI

Economy to shrink in FY21, says central bank; offers no estimate on contraction

August 06, 2020 11:00 pm | Updated 11:00 pm IST - MUMBAI

Silver lining: A good monsoon and a bumper kharif crop could ease food prices, the RBI noted. S. RAMBABU

Silver lining: A good monsoon and a bumper kharif crop could ease food prices, the RBI noted. S. RAMBABU

India’s GDP will shrink in 2020-21, while inflation will continue to stay elevated in the coming months, the Reserve Bank of India said on Thursday. However, the RBI refrained from projecting an estimate for the contraction, with an early containment of the COVID-19 pandemic being the only hope for a positive surprise.

The RBI is hopeful of inflation easing during the second half of 2020-21. Headline inflation had gone up from 5.8% in March to 6.1% in June 2020, with price pressures evident across items, including food. A good monsoon and a bumper kharif crop could ease food prices, especially those of protein-based food items and vegetables that are propping up food inflation, the central bank noted.

‘Fresh infections’

RBI Governor Shaktikanta Das said the global economy had been stuttering again after some signs of recovery in May and June, as a wave of fresh COVID-19 infections had taken hold. “The Monetary Policy Committee (MPC) noted that in India too, economic activity had started to recover from the lows of April-May; however, surges of fresh infections have forced re-clamping of lockdowns in several cities and States. Consequently, several high frequency indicators have levelled off,” Mr. Das said, adding that imports also fell sharply in June, reflecting weak domestic demand and low crude oil prices. “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, while remaining watchful for a durable reduction in inflation to use available space to support the revival of the economy,” he added.

“The decision to hold was correct as trajectory of economic growth, inflation, and external demand continues to be uncertain,” said Soumya Kanti Ghosh, group chief economic adviser, SBI. “The calibrated approach is in consonance with evolving situation while keeping enough headroom for the future,” he added.

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