(Photo: Aniruddha Chowdhury/Mint)
(Photo: Aniruddha Chowdhury/Mint)

From inflation targeting to growth, RBI changes tracks

  • Rate cut comes amid projections that growth would shrink from 7.75% to 6.65% in second half of current fiscal
  • The RBI highlighted that since the last MPC meeting in December, global economic activity has slowed down

NEW DELHI : With the economy projected to slow down in the second half (October-March) of the current fiscal, the focus of the Reserve Bank of India (RBI) seems to have shifted from inflationary concerns to sustaining the growth momentum.

In the first half of the year (April-September), the economy grew 7.75% while in the second it is expected to shrink to 6.65%. The Central Statistics Office has estimated full-year gross domestic product (GDP) growth at 7.2% in 2018-19.

The RBI on Thursday changed its monetary policy stance from calibrated tightening to neutral and cut the policy rate by 25 basis points (bps) on the back of benign headline retail inflation and slowing global growth.

Finance minister Piyush Goyal tweeted: “RBI’s decision to reduce the repo rate by 25 basis point from 6.5% to 6.25% and change of stance to ‘Neutral’ will give a boost to the economy, lead to affordable credit for small businesses, homebuyers etc. and further boost employment opportunities."

The central bank projected economic growth to accelerate to 7.4% in 2019-20 with risks evenly balanced. In the first half of 2019-20, it expects growth to clock 7.2-7.4% while in the third quarter (October-December), GDP is likely to grow at 7.5%. The International Monetary Fund expects India’s growth to touch 7.5% in 2019-20.

“India’s economy is poised to pick up in 2019, benefiting from lower oil prices and a slower pace of monetary tightening than previously expected, as inflation pressures ease," IMF said in an update to its biannual World Economic Outlook (WEO) last month.

( Graphic: Vipul Sharma/Mint)

The growth outlook is likely to be influenced by several factors, the Monetary Policy Council (MPC) said on Thursday.

“First, aggregate bank credit and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based. Second, despite soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds. In particular, trade tensions and associated uncertainties appear to be moderating global growth," it said.

The IMF cut its 2019 global growth projection by 20 basis points to 3.5% holding that risks to global growth tilt to the downside.

The RBI highlighted that since the last MPC meeting in December, global economic activity has slowed down.

“In China, growth decelerated in Q4:2018. Economic activity in Russia lost pace, with soft oil prices posing a downside risk to growth. The Brazilian economy appeared to have ended 2018 on a firmer note, driven by improved domestic spending and exports, though industrial activity continued to struggle to recover from the disruptions of H1:2018. In South Africa, the economic recovery in Q4:2018 remained gradual, tempered by weak industrial activity and subdued exports," the RBI said.

On the domestic front, the central bank said some indicators of investment demand, for example, production and imports of capital goods, contracted in November/December while credit flows to industry remain muted.

“Available data suggest that while revenue expenditure of the centre, excluding interest payments and subsidies, contracted in Q3, that of states increased sharply, thus maintaining overall growth in government spending," it added.

Further justifying the rate cut, the central bank said industrial activity, measured by the index of industrial production (IIP), slowed down in November, after an uptick in the festive month of October. “The year-on-year (y-o-y) growth in core industries decelerated to 2.6% (y-o-y) in December, pulled down by a slowdown in the production of electricity and coal; and contraction in petroleum refinery products, crude oil and fertilisers output," it added.

The RBI said high-frequency data on the services sector suggests some moderation in the pace of activity. “Sales of motorcycles and tractors imply weakening of rural demand in December. Sales of passenger cars—an indicator of urban demand—contracted, possibly reflecting volatility in fuel prices and mandated long-term insurance premium payments. Commercial vehicle sales also shrank in December 2018 from a high base of the previous year. Lead indicators for the hotels sub-segment, such as foreign tourist arrivals and air passenger traffic, point to softening in November-December," the central bank said.