The Reserve Bank of India (RBI) finally woke up to smell the coffee. On Friday, much to everyone’s disbelief, it lowered GDP growth estimates for the current fiscal by 74 basis points to 6.16%. This is the sharpest reduction by anyone till date, and raises concerns if India’s growth is indeed on the ropes.
Last month, several agencies, including IMF, ADB and Fitch lowered estimates to 6.5-7%, but none came close to RBI’s 6.1%, which to paraphrase Governor Shaktikanta Das, was ‘worse than all predictions’.
In some more bad news, the RBI even lowered FY21 first-quarter growth to 7.2% from 7.4% projected just two months ago.
The RBI lowered FY20 estimates four times since February, but none matched Friday’s savage cut.
But how and why did such a blunt revelation come about? The Monetary Policy Committee (MPC), rather belatedly, took note of high-frequency indicators pointing to sluggish domestic demand.
Further, all its in-house surveys were flashing muted expansion and demand weakness.
“The current quarter festive season is critical from a consumption demand revival standpoint and further monetary policy action will depend on the impact of the twin benefits of fiscal and monetary policies on demand and growth,” said Shanti Ekambaram, President, Consumer Banking, Kotak Mahindra Bank.
So is there a sunny side up? The RBI believes that the impact of its monetary policy measures since February will gradually feed into the real economy and boost demand.
Plus, the government’s series of fiscal policy moves are expected to revive sentiment.
“Monsoons have picked up with corresponding growth in Kharif production. Das noted that manufacturing and construction data looks better in August. But growth has been substantially revised downward to 6.1. That said, and basic signs of further local and global slowdown lately, it is likely that even these revised expectations will be disappointed,” said Suyash Choudhary, Head, Fixed Income, IDFC AMC.