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Global Uncertainty Poses A Challenge To The Growth Of India’s Economy: RBI

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On October 4, 2019, the Reserve Bank of India (RBI) in its Monetary Policy Report (MPR) expressed concerns over the global and domestic macroeconomic activities and its effect on Indian economic growth. In the press conference held on the same day, chaired by RBI Governor, Shaktikanta Das, has announced different monetary policy measures in getting the India economy on its path as projected in the previous monetary policy reports, with due changes.

The Slow Down In The Indian Economy

The MPR, in its first chapter, Macroeconomic Outlook, explains that the slowdown in the economy started in 2018-2019 and has further extended to the first half of 2019-2020 due to some of the reasons as follows:

  1. Weak private consumption and investment.
  2. Low domestic demand conditions.
  3. A slowdown in agriculture and allied activities.
  4. The initial delay and deficiency in the south-west moon.
  5. The high inflation on food and fuel has softened across major goods and services.

Due to these reasons, the RBI has cut down the forecast digits of the Gross Domestic Product (GDP) growth rate to 6.1% from 6.9% in 2019-2020 and to 7.0% from 7.2% in 2020-2021. The forecasts of the GDP growth rates can be seen in Table 1 and 2.

Table 1: Earlier Forecast Of The Real GDP Growth Rate During 2019-2020 And 2020-2021

Source: Survey of Professional Forecasters on Macroeconomic Indicators – Results of the 59th Round, RBI

Table 2: Present Forecast Of The Real GDP Growth Rate During 2019-2020 And 2020-2021

Source: Monetary Policy Report – October 2019, RBI

RBI Monetary Policy Measures

According to the fourth Bi-Monthly Monetary Policy Statement, 2019-20, A Resolution of the Monetary Policy Committee (MPC) of RBI, the repo rate has been reduced from 5.40% to 5.15%, that is, 25 basis points (bps) cut. Consequently, the reverse repo rate under the Liquidity Adjustment Facility (LAF) reduced to 4.90% from 5.15%, and the Marginal Standing Facility (MSF) rate and the Bank Rate to 5.40%. The detailed picture of the monetary policy measures in terms of repo rates and reverse repo rates can be seen in charts 1 and 2.

Chart 1: Bi-Monthly Repo Rates During 2018 And 2019

Source: RBI Bi-Monthly Statements from 2018 to 2019

Chart 2: Bi-Monthly Reverse Repo Rates During 2018 And 2019

Source: RBI Bi-Monthly Statements from 2018 to 2019

The decision to make these policy measures comes with the objective of achieving the medium-term target for Consumer Price Index (CPI) inflation of 4% within a band of +/- 2% while supporting growth. The underlying reasons for this decision come after the assessment of two economies, that is, firstly, the global economy and secondly, the domestic economy.

The Global Economy

The Domestic Economy

Conclusion

The RBI, in its MPR, said that the “intensification of global uncertainty around US-China trade tensions, a hard Brexit, and geopolitical tensions are key downside risks to the baseline growth path.”

The next meeting of the MPC of RBI is scheduled to be held from December 3 to 5, 2019.

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Featured Image credit: Punit Paranjpe/AFP/Getty Images
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