Reserve Bank of India governor says the economy is recuperating faster than anticipated. Photo: AFP/Punit Paranjpe

India’s economy is likely grow faster than forecast in the next six months as more sectors recover from the Covid shocks and demand picks up, the central bank said Friday.

However, The Reserve Bank of India (RBI) said after its two-day monetary policy committee meeting that supply-side challenges remain as does the elevated rate of inflation,

It said the Gross Domestic Product (GDP) may emerge out of the contraction of the past two quarters with 0.1% growth in the quarter ending December 31. The economy contracted a record 23.9% in the quarter ended June 30 and another 7.5% in the quarter ended September 30.

More significantly, the RBI also trimmed its contraction forecast from 9.5% to 7.5% for the full year to March 31. In the financial year ending March 2022, the central bank expects the economy to rebound and grow 6.5%, with the first half registering 21.9% growth.

“Data confirms that the economy is recuperating faster than anticipated and more sectors are joining the multi-speed upturn that I had highlighted in my statement in October,’’ RBI governor Shaktikanta Das said in Mumbai.

This picture taken on June 9, 2020, shows workers assembling Royal Enfield motorcycles after the government eased a nationwide lockdown. Photo: AFP/Arun Sankar

Still, the economy is not yet out of the woods, with elevated levels of inflation continuing to squeeze any room for the central bank to lower interest rates to encourage borrowing by consumers and manufacturers. The RBI expects consumer price inflation (CPI) at about 6.8% until the end of December.

Inflation had surged over the past two months to 7.6% in October. RBI’s key repo rate, or the rate at which it provides loans to banks, is at 4% a historic low following a series of rate cuts by the RBI. The central bank expects inflation to average 5.8% in the January to March quarter, leaving it scope just to ensure sufficient cash for borrowers without being able to cut rates any further.

Economists and businessmen look to the government to use its fiscal tools by cutting taxes, printing more currency notes or giving subsidies to help nurse economic activity back to health.

“While the inflation trajectory has moved up, at this point in time re-energizing growth should get all the attention,’’ Sangita Reddy, president of the Federation of Indian Chambers of Commerce and Industry, said.

“We anticipate that policy support, both from the RBI and the government, will be required well into the next year.’’

Corporate results for the second quarter indicate that demand conditions are recovering and profit margins are rising on the back of cost saving on expenses, the RBI said. Debt servicing capacity has gone up. The recovery in rural demand is expected to strengthen further, while urban demand is gaining momentum as unlocking spurs activity and employment, especially for labor displaced by Covid-19.

Unemployment which rose to a historic 23.5% in April, recovered by September, improving to 6.5% in November from 7.8% in February. The Composite Purchasing Managers’ Index (PMI) gained to 56.3 in November, close to its February levels of 57.6.

Laborers work on a production line at the Aqualite footwear factory in Bahadurgarh in the state of Haryana. Most industrial activity is below pre-Covid levels. Photo: AFP/Money Sharma

Despite the recovery, private investment remains slack and capacity utilization low. Exports are recovering unevenly, the central bank said. Most industrial activity including manufacturing, capital goods, infrastructure and construction, consumer durable goods, remains below pre-Covid levels.

Demand for steel, cement and electricity, key indicators of industrial pickup, remain below pre-pandemic levels, reflecting the weak environment. Hospitality and tourism are still worst-affected, especially foreign tourist arrivals which show no sign of recovery.

Yet, stock markets are booming despite the projection of GDP contracting 7.5% in the full year. The BSE sensitive index or Sensex rose 1% to an all-time high of 45,079. It has risen 76% since the March lows before the country was ordered to lockdown for more than two months. A key reason is inflow of a part of the cheap global surplus liquidity.

“The continued forward guidance of an extended accommodative stance will continue to serve the markets well,’’ Dinesh Kumar Khara, chairman of State Bank of India, biggest state-run lender, said.

“The upward revision of the full-year growth rate to minus 7.5% emphasizes that the worst is behind us though we must remain watchful.’’