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Business News/ Industry / Banking/  RBI cites global risks to cut GDP growth forecast for India

RBI cites global risks to cut GDP growth forecast for India

RBI cuts GDP growth forecast to 7.2% from 7.4% on loss of momentum in global economy
  • Central bank says the moderation of growth in the global economy may affect India’s exports
  • RBI said if gloval growth turns out to be 50 bps below the baseline, India's GDP growth and inflation could be lower by around 15-20 bps and 10 bps, respectively, below the baseline. (Sarvesh Kumar Sharma/Mint)Premium
    RBI said if gloval growth turns out to be 50 bps below the baseline, India's GDP growth and inflation could be lower by around 15-20 bps and 10 bps, respectively, below the baseline. (Sarvesh Kumar Sharma/Mint)

    New Delhi: A day after the Asian Development Bank (ADB) lowered India’s growth projection for 2019-20, the Reserve Bank of India (RBI) cut its growth forecast to 7.2% from 7.4% blaming loss of momentum in global economic activity as well as weakening domestic investment activity.

    The Indian economy decelerated to a five-quarter low in the December quarter to 6.6%, which led to the Central Statistics Office trimming its 2018-91 forecast to 7% from 7.2% estimated earlier.

    With the economy projected to slow down further in the fourth quarter, the central bank’s focus has shifted from inflationary concerns to sustaining the growth momentum since its February policy review when it began cutting repo rate by 25 basis points and changed its stance to neutral from calibrated tightening.

    In its annual report released along with the monetary policy review, the RBI said if global growth turns out to be 50bps below the baseline, domestic GDP growth and inflation could be lower by around 15-20bps and 10bps, respectively, below the baseline. “Further escalation of trade tensions and protectionist trends, increased volatility in global financial conditions over the uncertainty of the stance of monetary policy in the US and other advanced economies, uncertainty surrounding Brexit, a sharper slowdown in the Chinese economy and deviations of the south-west monsoon from the baseline assumption of a normal monsoon may pose downside risks to the baseline growth path," it added.

    RBI said the moderation of growth in the global economy might hit India’s exports, which have remained in low single-digit since November.

    Global merchandise trade growth is expected to slow to 2.6% in volume terms in 2019 from 3% in 2018, as the US-China trade war continued to generate uncertainty globally, figures issued by the World Trade Organization (WTO) on Tuesday showed.

    Economic affairs secretary Subhash Chandra Garg tweeted: “Given further moderation in inflation expectations as estimated by RBI, rate cut of 25bps is entirely appropriate. This should help in sustaining India’s growth to around 7.2-7.3% in FY20."

    RBI said the boost to private investment activity from faster resolution of stressed assets and increased as well as more broad-based credit offtake amid rising capacity utilisation can raise the baseline growth projection.

    Of the high frequency indicators of industry, the manufacturing component of the index of industrial production (IIP) growth slowed down to 1.3% in January 2019 due to automobiles, pharmaceuticals, and machinery and equipment. The growth of eight core industries remained sluggish in February at 2.1%. Credit flows to micro and small as well as medium industries remained tepid, though they improved for large industries. Capacity utilisation (CU) in the manufacturing sector, however, as measured by the Reserve Bank’s order books, inventory and capacity utilisation survey (OBICUS), improved to 75.9% in Q3 from 74.8% in Q2 exceeding its long-term average. The manufacturing purchasing managers’ index (PMI) remained in expansion zone for the 20th month in March. The key indicators of investment activity contracted such as production of capital goods in January and imports of capital goods in February.

    High frequency indicators of the services sector suggest significant moderation in activity. Commercial vehicle sales contracted in February. Other indicators of the transportation sector such as port freight traffic and international air freight traffic also contracted. However, indicators of the construction sector such as consumption of steel and cement production continued to show healthy growth. The hotels sub-segment showed some improvement in foreign tourist arrivals in January and international air passenger traffic in February. The services PMI continued to be in expansion zone for the 10th consecutive month in March.

    Rating agency Fitch Ltd, while keeping India’s sovereign rating unchanged at the lowest investment grade with stable outlook, also lowered its growth projection for 2019-20 to 6.8% from an estimated 6.9% a year ago.

    Fitch said benign food inflation and, to a lesser extent, easier global conditions following the US Fed’s shift to more dovish monetary policy communication, are enabling the RBI to be more supportive of growth. “The RBI became the first central bank in the Asia Pacific to begin an explicit easing cycle when it cut its policy rate by 25 bps in February 2019. Following today’s second 25bps policy rate cut, Fitch’s baseline is for the RBI to remain on hold for the remainder of 2019, although we acknowledge the central bank may look for opportunities for further easing," it added.

    ADB on Wednesday cautioned that its projection of 7.2% GDP growth for India in 2019-20 could see further downward revision if downside risks materialise. “Exports could suffer if the following threats exceed expectations: moderation in global demand as financial conditions tighten, uncertainty arising global trade tensions, and the weak economic outlook in industrial countries. On the domestic front, growth could suffer if tax revenue falls short or any disruption affects the ongoing resolution of the twin problems of bank and corporate balance sheets," it added.

    Devendra Kumar Pant, chief economist at India Ratings said considerable weakness in consumption activity as well as lower than expected investment demand may force economists to cut their GDP forecasts for 2019-20. “The Skymet estimate of below normal monsoon will be another reason for lower GDP projections," he added.

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    Updated: 05 Apr 2019, 05:13 AM IST
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