RBI policy: Central bank’s pessimistic GDP growth forecast, rate pause put ball in Narendra Modi govt’s court

The big takeaway from the RBI monetary policy announced today (Thursday) is the fact that the central bank’s monetary policy committee (MPC) is not yet ready to lower its guard on inflation and wants the government to do its bit to revive growth. Even then, the Reserve Bank of India (RBI) has clearly acknowledged the severity of the growth scenario by lowering the FY20 Gross Domestic Product (GDP) growth forecast sharply to 5 percent from 6.1 percent earlier. This signals the pessimism being built up on the growth front, even surprising the central bank’s own estimates a few months back. The message from the MPC to government is clear: The big growth stimulus needs to come from the North Block, not the Mint Road. The RBI has already cut the rates by a cumulative 135 basis points (bps) so far. But that hasn’t helped the borrowing rate come down. Even another quarter percentage point rate cut wouldn’t have made much difference to the common man because the reason for low credit growth in the economy is the absence of demand, not high borrowing cost. [caption id=“attachment_4349633” align=“alignleft” width=“380”] File image of RBI headquarters in Mumbai. Reuters.[/caption] “The GDP growth for Q2 2019-20 turned out to be significantly lower than projected. Various high-frequency indicators suggest that domestic and external demand conditions have remained weak,” the RBI has said in its policy document. At 5 percent, the RBI joins many private forecasters to dish out among the most pessimistic growth targets for the year. The RBI has conveyed the message to the government that it may not necessarily focus solely on growth with inflation inching up. But, the policy document doesn’t suggest that the current rate cut cycle is over. It tells that “there is monetary policy space for future action.” “The data on corporate finance and on projects sanctioned by banks and financial institutions suggest some early signs of recovery in investment activity, though its sustainability needs to be watched closely. The need at this juncture is to address impediments, which are holding back investments.” The CPI inflation projection has been revised upwards to 5.1-4.7 percent for the second half of the fiscal year 2020. The RBI has also noted that households’ inflation expectations, measured by the RBI’s November 2019 round of the survey, increased by 120 basis points over the 3-month ahead horizon and 180 basis points over the 1-year ahead horizon as they adapted to the spike in food prices in recent months. Based on the Reserve Bank’s consumer confidence survey, spending on non-essential items of consumption has shrunk compared to a year ago, it said. The government, which has been announcing several sector-specific measures over the last few months to arrest the slowdown course, must not miss the message from the Mint Road. The extent of the present economic slowdown is probably beyond what the government might have prepared for. And, there is a need for bigger fiscal stimulus government must prepare for.