RBI raises GDP forecast to -7.5% from -9.5%, keeps key interest rate unchanged

RBI Governor Shaktikanta Das pointed out that the economy has witnessed a faster than anticipated recovery.
RBI Governor Shaktikanta Das
RBI Governor Shaktikanta Das
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For the third time in a row, the Reserve Bank of India (RBI) has kept the key interest rate unchanged to subdue unabatedly high inflation rate and support growth. Accordingly, the Monetary Policy Committee of the central bank has maintained the repo rate -- or short-term lending rate for commercial banks -- at 4%.

According to RBI Governor Shaktikanta Das, India's economy is expected to witness a Real GDP growth of (-) 7.5% for FY21, revised from - 9.5% earlier. However, he said that GDP growth will turn positive in Q3 with 0.1% expansion and a 0.7% growth in Q4.

He pointed out that the economy has witnessed a faster than anticipated recovery. He cited that several high frequency indicators have pointed to growth in both rural and urban areas.

He further added that core inflation remains sticky and that consumer price inflation is projected at 6.8% in the third quarter, and 5.8% in Q4. MPC has been given the mandate to maintain annual inflation at 4% until March 31, 2021, with an upper tolerance of 6% and a lower tolerance of 2%.

He said in his address that RBI is ready to take further measures to ease liquidity; will continue to respond to global uncertainty.

The central bank had slashed the repo rate by 115 basis points since late March to support growth.

RBI had last revised its policy rate on May 22, in an off-policy cycle to perk up demand by cutting interest rate to a historic low.

The RBI governor also proposed to facilitate settlement of Aadhaar-enabled payment systems, IMPS, National Electronic Toll Collection (FASTAG), National Financial Switch, RuPay, UPI transactions on all days of the week in a bit to reduce settlement and default risks in the system.

In order to expand the adoption of digital payments, he also proposed to enhance the limits for contactless card transactions and e-mandates for recurring transactions through cards (and UPI) from Rs 2,000 to Rs 5,000 from January 1, 2021.

Further, to significantly improve the ecosystem of digital payment channels with robust security and convenience for users, RBI said it will issue ‘Reserve Bank of India (Digital Payment Security Controls) Directions’ for the regulated entities.

“These directions will contain requirements for robust governance, implementation and monitoring of certain minimum standards on common security controls for channels 9 like internet and mobile banking, card payments, etc. Draft directions in this regard will be issued shortly for public comments,” the Governor said.

The 26th meeting of the rate-setting MPC with three external members -- Ashima Goyal, Jayanth R Varma and Shashanka Bhide -- began on December 2. This is the second meeting of these members who are appointed for a term of four years.

The government moved the interest rate setting role from the RBI Governor to the six-member MPC in 2016. Half of the panel, headed by the Governor, is made up of external independent members.

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