The Monetary Policy Committee (MPC) statement is quite a stylized one that is presented in a predictable format. It is left to the analyst to read through the words and often the same lines are interpreted differently based on the context which makes the analysis exciting. This time too there is not really any significant difference in the presentation though some of the projections stand out.
The most important takeaway from the policy statement is the revision in GDP growth number from 6.9 percent to 6.1 percent for FY20. This sharp fall in projection is indicative of a rather sombre second-half notwithstanding the fact that a lot has been done to propel the economy by the government. Three major elements of our growth process would not be quite firing for the rest of the year.
First, consumption pick-up would at best be stable. The recent flurry in sales reported by Amazon and Flipkart would not witness sustained momentum and it is likely there could be cannibalisation from the brick and mortar shops. Second, the thrust provided by the government to companies to invest more through the cut in the corporate tax cut will not bear immediate results. Companies would first have to witness an increase in their profits before tax which will be contingent on sales growth before reaping the benefit of lower tax payment. Third, while the government has assured that there will be no compromise in the CAPEX for the year and everything will go according to the Budget Plan, the amount of Rs 3.38 lakh crore that has been projected will at best ensure stability and not provide any additional push to growth. Therefore, the overall performance will be muted this year.
The other projection of RBI which is significant pertains to inflation which is expected to remain below the 4 percent mark with the second half range being unchanged at 3.5-3.7 percent. This may be a bit optimistic given that food prices have begun to climb upwards and oil prices remain volatile (RBI has lowered its forecast for the rest of the year to $62.6 from $67/bbl earlier). Both have been acknowledged by the RBI though are not expected to exert any upward pressure on these forecasts as of now.
It must be pointed out that low food inflation has a mirror image of limited upside for farmers just as high food inflation is good for them as their income increases. The Ministry of Agriculture has projected a normal harvest with slight slippages in crops like rice which may not matter due to the MSP programme. However, the critical part will be the price received in the market for the harvest which has just entered the mandis. Low non-food inflation also means that it is not good news for the manufacturers who have to continue with limited price advantage as their pricing power would be under pressure.
On the monetary side, the action has been predictable. The reduction in repo rate by 25 bps can be looked at as a continuation of a series of rate cuts which is more to bring it in line with the real interest rate scenario. Given the trend so far, it can be expected that there would be more reductions in the repo rate if inflation remains benign and growth low key. The latter will be sluggish based on the RBIs revised estimates which means that cuts are inevitable. But, this is where the power of the repo rate ends as while the RBI can lower the rate, it cannot ensure that there will be a pick-up in credit. Growth in credit so far between April and August has been negative which means that demand is lagging. The stance has been retained as being accommodative which really means that there will be no future increase in interest rates.
The RBI has also reassured on the availability of liquidity which presently is in surplus but could come under pressure if there is a sharp pickup in bank credit. One can expect more OMOs in case more durable liquidity is required by the system. However, even today there is surplus liquidity but there is low (or negative) growth in bank credit. This is significant today as more than the cost and availability of credit is the willingness to lend which is not very positive so far. Banks have been hesitant to lend for large projects and have preferred retail credit as there are concerns on possible buildup of NPAs.Hence, the efficacy of the MPC measures has to be viewed against all these perspectives.
The fact that the RBI lowering rates has not translated to higher borrowing is also partly due to the weak transmission so far where banks have not lowered their rates commensurately. The recent notification of the RBI to get banks to link their lending rates on SME and retail loans to external benchmarks from 1 October would be a step ahead in improving the same. But as it is restricted to the non-larger entities, the impact would not be all-encompassing and the larger borrowers would still find their rates sticky.
The RBI prognosis for the rest of the year does to a large extent diminish hopes of a sharp revival which is what the government had indicated while making various announcements over a period of a month. It may be expected that the effort put in on the policy front, monetary and fiscal policies have built a firm base on which future growth can be built provided there are no major external disturbances. This is how the monetary policy measures must be viewed as the immediate correlation with growth is not visible and could be witnessed in the years to come.
(The author is chief economist, CARE Ratings)
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Updated Date: Oct 04, 2019 14:23:42 IST