New Delhi: The economy may grow at its weakest pace in six years in the current fiscal year, pulled down by the global recession, the Reserve Bank of India (RBI) said in a report.
The economy may grow 6.8% in the 12 months ending 31 March, less than the 7.7% forecast in September, according to the median compiled by the central bank from forecasts of 13 agencies, including the World Bank and Citigroup Inc.
“The balance of risks on growth outlook is tilted towards downside,” RBI said in a report in Mumbai before its quarterly monetary policy announcement on Tuesday. “While downside risks would be extending to the future, the fall in commodity prices and the coordinated fiscal and monetary stimulus are expected to revive the growth momentum.”
RBI’s D. Subbarao. Gautam Singh / AP
RBI governor D. Subbarao had signalled last month he may be inclined to continue lowering rates when he said the coming fiscal year starting 1 April will be “challenging”. He has room to cut rates because of slowing inflation, which the central bank said on Monday “will be significantly lower than projected”.
“India’s growth outlook has worsened in recent months,” said Sherman Chan, an economist at Moody’s Economy.com in Sydney. “Rapidly cooling inflation has given the RBI room to ease monetary policy.”
The country’s key wholesale price inflation slowed to 5.6% this month, half the level recorded in August, driven down by lower commodity prices and weakening consumer demand. RBI in October had forecast inflation to be at 7% by 31 March.
Subbarao reversed four years of monetary tightening since October, acting in coordination with the government’s fiscal stimulus plans, which included Rs20,000 crore of new spending on roads and ports to stimulate investments and consumption in Asia’s third largest economy.
India’s industrial production grew 3.9% between April and November, almost half of the 9.2% during the same period in the previous year, the government had said on 12 January.
The country’s overseas shipments dropped 9.9% in November from a year earlier after contracting 12.1% in October.
Policymakers around the world are slashing borrowing costs and spending more amid the global economy’s worst crisis since the Great Depression.
Monetary policy is the main tool available to authorities in India to support growth as public debt the equivalent of four-fifths of gross domestic product limits their ability to step up spending like in China, said Sanjay Mathur, a Singapore-based economist at Royal Bank of Scotland Group Plc.
China, whose public debt is only 22% of the economy, unveiled a 4 trillion yuan (about Rs29 trillion) stimulus package in November and is adding support for 10 key industries, including tax cuts and subsidies for steel and auto firms. China’s economy expanded 6.8% last quarter, the slowest pace in seven years.
Subbarao had lowered interest rates to a record on 2 January after he cut the repurchase rate by one percentage point to 5.5% and the reverse-repurchase rate by the same margin to 4%. He had also cut the cash reserve ratio (CRR), or the amount of cash that lenders need to set aside as reserves, by 50 basis points to 5%. The CRR was 9% in October.