BackRBI moves to boost demand as growth impulses weaken
Sharp slowdown in investment, continuing moderation in private consumption growth key concerns, says MPCPrivate consumption moderated to 7.2% in the March quarter from 8.1% in the December quarter
PremiumNew Delhi: The Reserve Bank of India (RBI) in its bimonthly monetary policy statement noted that risks around its baseline inflation trajectory of 3.0-3.1% for the April to September period emanate from uncertainties of monsoon, unseasonal spikes in vegetable prices, international fuel prices and their pass-through to domestic prices, geopolitical tensions, financial market volatility and the fiscal scenario.
However, what ultimately dictated a change in its monetary policy stance to accommodative from neutral and a third consecutive rate cut of 25 basis points (bps) is the overwhelming growth concern facing the economy.
India’s economy slowed to a near five-year low of 5.8% in the March quarter, which forced RBI to revise its growth projection for 2019-20 to 7% from 7.2% estimated earlier. RBI said it expects economic growth to range between 6.4-6.7% from April to September and accelerate to 7.2-7.5% during the October to March period. In 2018-19, India’s economy grew at 6.8%.
“Growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy. A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern," the Monetary Policy Committee of RBI said in a statement.
Growth in gross fixed capital formation which indicates the investment demand in the economy dipped to a single-digit of 3.6% in the March quarter from double-digit growth in the first three quarters of 2018-19. Private consumption moderated to 7.2% in the March quarter from 8.1% in the December quarter.
RBI said the headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts. “Hence, there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate," it added.
The central bank said the March quarter GDP data indicates that domestic investment activity has weakened and overall demand has been weighed down partly by slowing exports. “Weak global demand due to an escalation in trade wars may further impact India’s exports and investment activity. Further, private consumption, especially in rural areas, has weakened in recent months," it added.
Recent macro indicators such as vehicle sales and air traffic growth also point towards a slowdown in consumer spending. Sales of automobiles across segments in India fell 16% in April to touch the lowest in eight years, while domestic air travel contracted 4.5% in April for the first time in nearly five years.
Rural demand has been a weak point for the economy due to the sharp drop in farm prices. Hindustan Unilever Ltd, considered the bellwether for India’s fast-moving consumer goods (FMCG) market, saw its volume growth drop to 7% the March quarter against double-digit growth in several quarters.
Briefing reporters, RBI governor Shaktikanta Das said the cumulative 75bps rate cut this calendar year will translate into higher and faster transmission, helping boost consumer demand. “Till now, the transmission has been of 21 basis points so far as fresh rupee loans are concerned. The (monetary) transmission will find its impact on individual consumer loans, consumer durables loans, two-wheeler loans and there is a good chance of interest rates falling in those sectors for new loans," he added.
Sunil Sinha, principal economist at India Ratings and Research said even a change in the policy stance had become inevitable in view of three consecutive rate cuts. “By changing its policy stance from neutral to accommodative, RBI has signalled that rate increase is not on the table in the near term. Although we believe there is room for one more rate cut of 25bps in this fiscal, its timing will depend on the progress of monsoon, fiscal stance of FY20 budget and the incoming high-frequency data," he added.
Economic affairs secretary Subhash Chandra Garg on 30 May attributed the fourth quarter slowdown to temporary factors, and said growth will pick up.
“Slowdown in the fourth quarter GDP was due to temporary factors like the stress in the NBFC (non-banking financial company) sector affecting consumption finance. The first quarter of the current fiscal would also witness relatively slow growth and from second quarter onwards, it will pick up," Garg said.
The International Monetary Fund in its G-20 Communique ahead of the G-20 finance ministers meeting beginning Saturday said that in India, reforms to hiring and dismissal regulations would help incentivize formal job creation and, combined with an increase in female labour force participation, would help absorb the country’s large demographic dividend.
RBI said global economic activity has been losing pace after a somewhat improved performance in the first quarter of 2019, reflecting a further slowdown in trade and manufacturing activity. 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) showed.
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