The RBI’s bimonthly monetary policy review meeting gives us an idea of the economic headwinds. At the latest Monetary Policy Committee’s bimonthly policy review meeting, held in October, the RBI announced a repo rate cut of 25 basis points. The repo rate is now 5.15 per cent and the RBI has cut rate by 135 bps in total starting from February 2019 till now for the fifth time. This measure was adopted to increase the supply of money in the economy and to boost spending. Let us look at the other important takeaways of the RBI’s policy review meet.
The economy has been going through a rough patch, but things have been looking up for the agricultural sector. The delay in the arrival in the south-west Monsoon was made up by the high cumulative all-India rainfall in August and September. The rabi season looks promising with the replenishment of reservoirs and improvement in soil moisture conditions due to abundant rainfall. The report says, “Overall, the prospects of agriculture have brightened considerably, positioning it favourably for regenerating employment and income, and the revival of domestic demand.” A boost in the agricultural sector could lead to a surge in rural incomes which will drive rural demand.
Tolerable rise in inflation
The CPI inflation for the second quarter of FY 2019-20 stood at 3.2 percent which was higher than the RBI’s projection of 3.1 percent for the quarter. The CPI inflation is touted to increase for the first quarter of FY 2020-21 with a projection of 3.6 percent. CPI is a measure of the average change in prices of household goods and services. Food inflation which had spiked in August is projected to be well under control and the trend is expected to continue with prices of vegetables and pulses remaining stable. “Three-month and one-year ahead inflation expectations of households polled by the Reserve Bank have risen in the current round reflecting near-term price pressures,” the report said. This means that most households predict price rises in the coming three months to a year and this could curtail consumption. However, the impact of this rise in inflation may be offset by the RBI’s rate cut. With the rate cut, loans can become cheaper and that may act as an incentive for people to spend more which can boost the economy.
One of the catalysts in India’s slowdown in economic growth has been a decrease in consumption by consumers. According to the RBI’s monetary policy report, consumer confidence fell to a six-year low in September. While spending on essentials has not suffered a setback, spending on luxury items and non-essentials has weakened. The consumer economy variables such as passenger sales growth, tractor sales growth have been flashing in a red for a few months now. On the positive side, domestic air passenger traffic showed a slight improvement in August. The review report states, “Indicators of rural demand, viz., tractor and motorcycles sales, contracted. Of underlying indicators of urban demand, passenger vehicle sales contracted in July-August.” The bleak consumption scenario is expected to prevail given that sluggishness in investments has been a major factor. The RBI hopes that the monetary policy easing will gradually ease off the contraction in consumption.
Lull in industrial activity
Industrial output, which measures the level of economic activity has also derailed off the growth trajectory. The industrial output fell by 1.1 percent month-on-month (MoM) in August, according to the Index of Industrial Production (IIP) data. Manufacturing output, which is major component of the index, decreased by 1.2 percent in August. The production of capital goods, infrastructure goods and consumer durables witnessed drop in production. Consumer non-durables and the mining sector have been going strong. There is little optimism about a turnaround in demand and the lull is expected to persist in the coming months.
India’s trade deficit has narrowed due to contractions in imports. However, exports have registered dismal growth. Merchandise exports were anaemic in July and August due to a decline in shipments of engineering goods, petroleum products, gems and jewellery and cotton yarn. Current account deficit stood at 2 percent of GDP in the first quarter of 2019-20 as opposed to 2.3 percent a year ago. In the wake of the current global economic slowdown and the ongoing US China trade war, exports growth is likely to remain weak.
One related number : 6.1%
RBI’s Monetary Policy Committee (MPC) slashed India’s GDP growth projection for 2019-20 to 6.1% from 6.9% as it had estimated in the August credit policy review. Weak domestic demand, subdued exports, dull private consumption and a slowdown in the global economy are the main factors behind the RBI curtailing the GDP growth projection
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