The Reserve Bank of India (RBI) sees the Indian economy contracting 9.5% this fiscal as a result of the disruptions caused by the Covid-19 pandemic.

RBI governor Shaktikanta Das is hopeful that growth will reverse the trend of the first three quarters of the financial year and turn positive during the January-through-March period due to improving signs of recovery. He emphasises that the country's "focus must shift from containment to revival".

"Growth may break out of contraction and turn positive during January-March," Das added.

State Bank of India (SBI) group chief economic adviser Dr Soumya Kanti Ghosh, however, expects all four quarters of this fiscal to remain negative. "Based on the rural/urban demand with muted external situations, the RBI has projected a decline of 9.5% for FY21 with 9.8% decline in Q2, 5.6% decline in Q3 and tad positive growth of 0.5% in Q4. For Q1 FY22, the RBI projected growth rate of 20.6% due to huge base effect. We, however, believe that all the four quarters of this fiscal might remain in negative territory and any positive growth will be seen only in FY22," he said.

Rating agencies have also predicted a contraction in India's gross domestic product (GDP). The World Bank, in its report, said that India's GDP growth is likely to contract 9.6% in FY21, slipping further from its earlier forecast of 3.2%. Fitch put India's GDP shrinkage at 10.5% in the current financial year, further down from negative 5% earlier.

The RBI has kept the repo rate, the key interest rate at which it lends to commercial banks, unchanged at 4%. Inflation is above the central bank's target of 6%. Headline inflation based on consumer price index (CPI) fell marginally to 6.69% in August from 6.73% in the preceding month. In August 2019, CPI inflation was at 3.28%.

The central bank's six-member Monetary Policy Committee (MPC) noted that manufacturing activity is likely to gain some traction from Q4FY21 onwards, while contact-intensive services sector could take longer to recover.

In a favourable scenario where there is faster normalisation of supply chains, the MPC expects growth in FY21 and FY22 could come in at -7.5% and 11.6%, respectively (against baseline growth expectation of -9.5% in FY21 and 10.1% in FY22.

In an unfavourable scenario where there is a second wave of Covid infections and inflation is more persistent, the MPC expects growth to come in at -11.5% in FY21 and 7.2% in FY22.

"The penetration in rural areas, which increased since July, has now moderated. However, the cases are increasing in urban areas, which in turn raises questions on the sustainability of economic recovery going forward," states Ecowrap, the economic publication of SBI.