Revival of demand, investment top priority: RBI annual report

Mumbai: Reviving consumption demand and private investment remains the top priority in the current fiscal, the Reserve Bank of India (RBI) said on Thursday, signalling the possibility of at least one more interest rate cut this year.

To revive growth, governor Shaktikanta Das asked banks to pass on past rate cuts to borrowers at a faster pace by linking lending rates to external benchmarks such as repo rate.

Das’s renewed pitch for addressing the causes of the slowdown in Asia’s third-largest economy comes amid sales of passenger vehicles dropping to a near two-decade low in July and news of mass layoffs across several industries. The central bank has already slashed rates by 110 basis points this year to spur growth.

The recent deceleration could be in the nature of a soft patch mutating into a cyclical downswing, rather than a deep structural slowdown, RBI said in its annual report released on Thursday. Nonetheless, there are still structural issues in land, labour, agricultural marketing and the like that need to be addressed, it added.

“The diagnosis is difficult; these conditions are hard to disentangle cleanly, at least in the formative state,” the central bank said.

RBI, however, cautioned that a broad-based cyclical downturn is underway in several sectors—manufacturing, trade, hotels, transport, communication and broadcasting, construction, and agriculture.

“However, it is important to note that trend growth has witnessed slight moderation since 2016-17, contributed mainly by the services sector, especially trade, hotels, transport, communication and broadcasting, and financial, real estate and professional services,” it said.

The delayed onset and skewed distribution of the south-west monsoon may pose downside risks to crop production and rural consumption demand, the report said, adding that this is evident in the sharp contraction in the sales of motorcycles and tractors.

The central bank has forecast India’s GDP to grow at 6.9% for FY20—in the range of 5.8-6.6% during the first half of the year and 7.3-7.5% in the second half.

The nature of the slowdown, RBI said, will determine the policy response—illustratively, a soft patch can be looked through, while a cyclical downswing will warrant counter-cyclical actions in terms of monetary and fiscal policies, but a structural slowdown will need deep-seated reforms.

The annual report pointed out that throughout the year, protectionist policy pronouncements and actions dominated the global political arena.

According to the central bank, these dealt a body blow to world trade, roiled financial markets and posed risks to macroeconomic prospects of several economies, advanced and emerging alike, that have sought to employ the engine of trade to integrate into the global economy.

“They also fuelled an animated debate on the end of globalization. Yet, the unfolding of events during the year demonstrated that the world remains coupled, or at least uniformly vulnerable to global shocks,” it said.

Macroeconomic outcomes in the first quarter of 2018 seemed to indicate that the global economy was on an extended expansionary phase, it said.

According to the central bank, another conduit through which trade wars and other sources of global spillovers impacted India during 2018-19 is the intertwining of the finance and confidence channels.

“For countries like India, which traditionally run current account deficit, viable external financing can become an additional consideration for holding adequate precautionary buffers. It is prudent to bear in mind the experience of 2018-19 when a crude oil price-induced expansion in the current account deficit through the first three quarters of the year was coincident with risk-averse portfolio outflows, warranting the use of reserves for meeting financing requirements,” said RBI.