RBI says economy to contract 7.5% for FY21, predicts growth to turn positive in second half

The RBI has revised its forecast of economic growth for the current fiscal year (2020-21) to (-)7.5 per cent compared to its earlier forecast of (-)9.5%.
The second half of the fiscal year is expected to show positive growth, Shaktikanta Das said.

The economy declined by a massive 23.9 per cent in the first quarter on account of the COVID-19 pandemic.

The change in forecast has been prompted by a surge in demand in both rural as well as urban areas.

The RBI kept the policy repo rate at 4 per cent as surging inflation has been a worry. The CPI has been above the tolerance band of the RBI for the seventh straight month in October. However, the governor said that bumper Kharif harvest along with cooling off of vegetable prices are likely to soften inflation.

The sharp rebound seen in the second quarter GDP has been surprising but at the same time many experts, including former RBI governor Raghuram Rajan, have cautioned against being overly optimistic about these numbers as most of the recovery has been a result of pent-up demand.

Even the RBI governor Shaktikanta Das had underlined the sustainability of demand post the festive season amid resurgence of cases.

The RBI in its October policy review had predicted growth to contract by 9.5 per cent in the current fiscal year.

According to the Finance Ministry's Monthly Economic Review, “the year-on-year GDP contraction of 7.5 per cent in Q2 of 2020-21 underlies a quarter-on-quarter surge in GDP growth of 23 per cent. This V-shaped recovery, evident at the half-way stage of 2020-21, reflects the resilience and robustness of the Indian economy".

There has been an across the board revision in FY21 growth estimates with most now forecasting a slower than expected contraction for the current fiscal year.

Most of the high frequency indicators have underpinned such revisions as they continue to show improvement.