New Delhi: The Reserve Bank of India (RBI) Friday announced a 40 basis points reduction in key policy rates while estimating that Indian economy will shrink in 2020-21.

The repo rate, or the rate at which RBI lends to banks, now stands at a record low of 4 per cent.

The decision by the Monetary Policy Committee (MPC) was taken with a 5-1 majority, RBI governor Shaktikanta Das said in a digital address.

Speaking on the Indian economy, Das said, “We should have faith in India’s resilience”.

However, he pointed out that domestic economic activity has been impacted severely amid the nationwide lockdown. “High frequency indicators indicate a collapse in demand across urban and rural areas beginning March 2020,” he said, adding that the biggest blow has been to private consumption.

The MPC move comes at a time many economists have forecast the Indian economy to contract by as much as 5 per cent since the Covid-19 pandemic brought a complete halt to economic activity for nearly two months this financial year.

On 27 March, the RBI had announced a 75 basis points rate cut to support growth.

‘Acute risks’

The MPC assessed that the macroeconomic impact is turning out to be more severe than anticipated.

The central bank expects inflation to remain elevated in the first half of the financial year but to stay below the 4 per cent target in the second half. At the same time, it anticipates that the economy will contract in 2020-21, but doesn’t make a forecast.

“Risks to growth are acute whereas risks to inflation will be short lived,” said Das.

The RBI governor added that agriculture remains a beacon of hope at a time when many sectors are impacted. The forecast of a normal south-west monsoon also provides a solace, he said.

The Narendra Modi government announced a nationwide lockdown beginning 25 March to battle the pandemic. This completely brought to a halt all manufacturing and service industries, leading to massive job losses all over.