True to expectations, the RBI announced on Wednesday that the Monetary Policy Committee has voted for the fourth straight repo rate cut. In fact, the 35 basis points reduction to 5.4 per cent was steeper than had been widely predicted, bringing the rate down to a nine-year low, as benign inflation gave the RBI room to help an economy that is growing at its slowest pace in nearly five years.
This makes RBI the most dovish among major Asian central banks. The last time the regulator made so many back-to-back cuts was after the global financial crisis over a decade ago. According to RBI Governor Shaktikanta Das, the economy is in the midst of a cyclical slowdown and not a structural one. He expressed confidence of a revival soon on the back of cheaper money and government measures to boost growth.
India's growth, which decelerated to 5.8 per cent in the March quarter, is expected to slip further. The MPC has now lowered its growth forecast to 6.9 per cent from 7 per cent in the June policy. The third bi-monthly Monetary Policy Statement highlights several other warning signs. Here are the main areas of concern:
The cumulative southwest monsoon rainfall has been 6 per cent below the long-period average (LPA) up to August 6. In the bargain, the area sown under kharif crops has been close to 7 per cent lower (year-on-year).
Latest government data shows that growth of eight core industries - coal, crude oil, natural gas, refinery products, fertiliser, steel, cement and electricity - dropped to a mere 0.2 per cent in June, mainly due to contraction in oil-related sectors as well as cement production. In contrast, these sectors had expanded by 7.8 per cent in June 2018. "Industrial growth, measured by the Index of Industrial Production (IIP), moderated in May 2019, pulled down by manufacturing and mining even as electricity generation picked up on strong demand," read the statement, adding that the production of capital goods and consumer durables has decelerated while construction activity indicators have slackened.
The MPC noted that tractor and motorcycle sales - indicators of rural demand - have continued to contract. Similarly, passenger vehicle sales, one of the three indicators of urban demand, contracted for the eighth consecutive month in June while commercial vehicle sales slowed down even after adjusting for base effects.
Inflation inching up
Retail inflation edged up to 3.2 per cent in June from 3 per cent in April-May, driven by food inflation, even as fuel inflation and CPI inflation excluding food and fuel moderated. The MPC further noted that inflation in the food group rose to 2.4 per cent in June from 1.4 per cent in April courtesy the sharp uptick in prices of meat and fish, pulses and vegetables.
"Import of capital goods, a key indicator of investment activity, contracted in June," said the statement. According to latest government data, imports saw a dip of 9 per cent to $40.29 billion in June mainly due to falling prices of petroleum products. In the same period, India's exports entered a negative zone after a gap of eight months recording a decline of 9.71 per cent to $25.01 billion, which means a trade deficit of $15.28 billion.
Of course, India is not the only country worrying about GDP growth currently. "Global economic activity has slowed down since the meeting of the MPC in June 2019, amidst elevated trade tensions and geo-political uncertainty," the statement said. GDP growth in the US decelerated in Q2FY19 on weak business fixed investment, while it moderated in the Euro area. The Chinese economy decelerated to a multi-year low in Q2, while Russia saw continued subdued economic activity on slowing exports and retail sales.
According to the MPC, the baseline inflation trajectory for the next four quarters will be shaped by several factors. To begin with, the uptick in food inflation may be sustained by price pressures in vegetables and pulses as more recent data suggest. Secondly, despite excess supply conditions currently, global crude oil prices may likely remain volatile due to geo-political tensions in the Middle-East. Moroever, the outlook for CPI inflation excluding food and fuel remains soft. "Manufacturing firms participating in the industrial outlook survey expect output prices to ease in Q2. Taking into consideration these factors and the impact of recent policy rate cuts, the path of CPI inflation is projected at 3.1 per cent for Q2:2019-20 and 3.5-3.7 per cent for H2:2019-20, with risks evenly balanced," the statement added.
India's GDP growth is expected to pick up to 7.3-7.5 per cent in the second half off the current fiscal, with risks somewhat tilted to the downside. The growth rate for the first quarter of FY21 is projected at 7.4 per cent.
(Edited by Sushmita Choudhury Agarwal)