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Inflation blues, but economy recouping fast

10:48 PM Dec 04, 2020 | FPJ Bureau

Mumbai: The Reserve Bank of India on Friday left interest rates unchanged as inflation is stubbornly high. The Monetary Policy Committee expects inflation to remain elevated, barring some transient relief in winter months, and this has constrained it from "using the space available to act in support of growth", RBI Governor Shaktikanta Das said unveiling the policy review.

It is understood that supply-side issues, including profit maximisation at retailers' end, are hurting on the inflation front. The central bank has pegged it at 6.8% for the third quarter of the current fiscal.

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Nonetheless, the committee said the economy was recuperating fast and would return to positive growth in the current quarter itself.

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In the year as whole, the economy is likely to contract by 7.5%, which is an improvement over Reserve Bank's previous projection of 9.5% contraction, the Governor said while unveiling the bi-monthly monetary policy review.

The economy contracted by 23.9% in the first quarter and 7.5% in the second quarter on account of the COVID-19 pandemic.

Observing that the prospects of growth have brightened with the progress on the vaccine front, Das said, the economy was likely to record a growth of 0.1% in Q3 and 0.7% in Q4.

The six-member MPC, headed by Das, therefore voted unanimously to leave the policy repo rate unchanged at 4%. It also decided to continue with the accommodative stance of monetary policy as long as necessary – at least through the current financial year and into the next year – to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target.

Das noted that the recovery in rural demand is expected to strengthen further, while urban demand is also gaining momentum. Consumers remain optimistic about the outlook and business sentiment of manufacturing firms is gradually improving.

However, private investment is still slack and capacity utilisation has not fully recovered. While exports are on an uneven recovery, the prospects have brightened with the progress on the vaccines.

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