RBI: Here’s Why Monetary Policy Committee May Keep Interest Rates At Record Low

The performance of both manufacturing and services sectors, which contribute more than two-thirds of India's gross domestic product, were badly impacted.

Representative Photo

New Delhi: After reeling under the second wave of Covid-19, the Indian economy has shown signs of slowing in June as the localized lockdowns took opening up impacting activity. It is now expected that the monetary policymakers meeting next week will consider keeping interest rates at record lows to aid a durable recovery.

Here are reasons why interest rates to be sustained at record low

Business activity took a hit: The performance of both manufacturing and services sectors, which contribute more than two-thirds of India's gross domestic product, were badly impacted hitting the overall activity indicator to 5 from 6. This level was not witnessed since February and remains the first downward shift since May 2020 data, according to Bloomberg.

The Markit India Services Index came down to 41.2 in June, from 46.4 in May, with a reading under 50 indicating a contraction. According to the report a similar survey also indicated shrinking of activity in the manufacturing sector, dragging the composite index deeper into contraction territory.

Exports rose 48.3 per cent year-on-year in June, and clocked a 69.4 per cent year-on-year rise in May, on the back of steady global demand. Overseas demand for engineering goods and chemical products aided the sector along with shipments of farm produce.

Consumer Activity Also Dips

Retail auto sales, which indicates the trend in consumer demand, recovered even as it faced headwinds like a steep increase in commodity prices, a semi-conductor shortage and fear of a third wave, according to Kenichi Ayukawa, president of the Society of Indian Automobile Manufacturers. However, the impact of the second wave's on rural demand wearing off, motorcycle and two-wheeler sales recorded a recovery in June. The tractor segment also recovered last month, with better monsoon prospects helping sentiment.

Industrial Activity

Industrial production also witnessed expansion albeit at a slower pace, growing 29.3 per cent in May from a year earlier, compared with almost 135 per cent in April. The month-on-month industrial output fell 8.0 per cent from April, with Bloomberg Economics' Gupta citing lockdowns that led to retail closings.