Mumbai: Weak domestic and external demand conditions led the Reserve Bank of India (RBI) Wednesday to cut its economic growth forecast for 2019-20 to 6.9 per cent.
In its third policy review of the current fiscal where it cut the central bank’s key lending rate by 35 basis points (bps), the RBI’s monetary policy committee (MPC) also reduced the country’s growth rate projection for 2019-20 from the earlier 7 per cent.
At the previous policy review in June, the MPC had projected India’s real GDP growth for 2019-20 at 7 per cent – estimated in the range of 6.4-6.7 per cent for the fiscal’s first half and 7.2-7.5 per cent for the second half — with risks evenly balanced.
Besides, the GDP growth for the first quarter of fiscal 2020-21 has been projected at 7.4 per cent.
“Various high frequency indicators suggest weakening of both domestic and external demand conditions,” the MPC said in a statement.
“The ‘Business Expectations Index of the Reserve Bank’s industrial outlook survey’ shows muted expansion in demand conditions in Q2 (second quarter), although a decline in input costs augurs well for growth,” it said.
The MPC also said that the impact of monetary policy easing since February 2019 is also expected to support economic activity, going forward. This is the fourth successive cut in the repo, or the RBI’s short term lending rate for commercial banks, made over four consecutive bi-monthly monetary policy reviews.
“Moreover, base effects will turn favourable in H2:2019-20. Taking into consideration these factors, real GDP growth for 2019-20 is revised downwards from 7 per cent in the June policy to 6.9 per cent — in the range of 5.8-6.6 per cent for H1:2019-20 and 7.3-7.5 per cent for H2 – with risks somewhat tilted to the downside…,” the MPC statement said.
The RBI administered the rate cut amidst falling demand for homes, vehicles, steel, subdued construction activities and contracted imports. Apart from the RBI, the Central government is also concerned with the slackening growth.
In New Delhi, Finance Minister Nirmala Sitharaman chaired a meeting with representatives of the auto sector on Wednesday to understand the cause of the slowdown in the key sector.
Recently, a slew of key economic indicators — including car sales — suggest that the economy is yet to recover from a dismal performance in the (January-March) quarter of the last fiscal, when the GDP growth declined to a five-year low of 5.8 per cent.
Growth in the last fiscal slumped to a five-year low of 6.8 per cent. The 2019-20 first quarter GDP growth numbers are expected by this month-end.
Last month, the IMF and Asian Development Bank (ADB) had cut India’s growth forecast, citing global and domestic headwinds. The IMF in its latest projection, expects the Indian economy to grow at 7 per cent in 2019 and 7.2 per cent in 2020.
Similarly, the Asian Development Bank has also lowered India’s GDP growth forecast to 7 per cent for the current year on the back of fiscal shortfall concerns. However, industry observers offered mixed reactions to the RBI’s 35 bps cut in repo rate to address growth concerns.
“The 35 bps rate cut should be seen as a signal that the RBI MPC is quite concerned with the growth outlook beyond the usual 25 bps rate cut in a business-as-usual scenario,” Kotak Institutional Equities’ Senior Economist Suvodeep Rakshit said.
“Transmission to lending rates will likely remain weak unless there is a clear visibility of adequate liquidity sustaining over the medium term,” he added.
According to Rajiv Singh, CEO, Karvy Stock Broking, the repo rate cut should help improve liquidity, consumption and demand scenario in the economy, albeit with a lag.