HYDERABAD: The Reserve Bank of India on Thursday confirmed our worst fears that the country’s economy is withering on the vine, as it revised FY20 GDP growth rate forecast to 5% — a sharp 240 bps lower than February’s 7.4%.
However, instead of proceeding with protocol, RBI Governor Shaktikanta Das preferred a ‘temporary pause’ on rate cuts to nip rising inflation in the bud. Retail inflation firmed up to 4.6% in October and, hence, RBI concluded that repo rate of 5.15% is just what is needed.
From unequivocally championing the need to support growth, Das’ action, or rather inaction, on Thursday frowned markets with benchmark indices closing in the red. None had expected RBI’s savage call to sit out in the ongoing monetary easing cycle.
It’s evident the economy needs urgent help, yet Das refrained from easing up, perhaps proving a point that demand isn’t a function of interest rates alone. They improve sentiments alright, but since the 135 bps reduction proved futile even on a fragile economy like ours, RBI instead passed the baton to fiscal policy to bail out the nation from the brink.
Thursday’s status quo may or may not turn out to be Das’ bespoke move, but right now the decision to not summon additional monetary policy levers seems like an outcome borne out of indirection.
For, RBI appears clueless on where growth, inflation and interest rates are headed. Hence, the Monetary Policy Committee chose the dominant safe system approach to carefully monitor incoming data before its next strike.
So, Das needs only one thing between now and February: clarity. Clarity on inflation, particularly by when food prices will regain obedience, on interest rate transmission, and on the impact of fiscal reforms.
GST collections are disappointing and RBI admitted that a similar scenario in direct taxes and customs duty collections cannot be ruled out.
“It’s likely that the government may initiate some more counter-cyclical fiscal measures to arrest the slowdown. The forthcoming Union Budget will provide greater clarity,” Das reasoned.
So, will RBI be overtly worried with a potential breach in fiscal deficit target should government open up the money spigot to revive growth? Das gave away little, insisting a synchronised monetary and fiscal policy is needed to hold the economy together.
According to the central bank, green shoots were visible from the capex cycle, but the MPC wants to rule out that the noticeable shift in fixed assets isn’t a false dawn. “While these developments are still tentative, they would need to be carefully monitored with incoming data to look out for a durable revival in the capex cycle,” Das said.
Meanwhile, RBI has to deal with its own dysfunction of rate transmission by nudging banks to lower lending rates. “More than flare in inflation, lack of transmission of rate cut seems to have been the bigger reason for the rate pause,” said Sujan Hajra, chief economist & executive director, Anand Rathi.
CAUTIOUS, BUT OPTIMISTIC
Economic activity has weakened further and the output gap remains negative, RBI notes
Inflation is rising in the near-term, but it is likely to moderate below target by Q2 of 2020-21
There is monetary policy space for future action, but status quo is the best policy for now Retail inflation projection raised to 5.1-4.7% for the 2nd half of 2019-20 and 4.0-3.8% for 1st half of 2020-21
Real GDP growth revised downwards to 4.9-5.5% in the second half and 5.9-6.3% for the first half of 2020-21