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:
- Weak private consumption and investment.
- Low domestic demand conditions.
- A slowdown in agriculture and allied activities.
- The initial delay and deficiency in the south-west moon.
- 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
Table 2: Present Forecast Of The Real GDP Growth Rate During 2019-2020 And 2020-2021
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
Chart 2: Bi-Monthly Reverse Repo Rates During 2018 And 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
- A weakening of global economic activities.
- Heightened uncertainty emanating from trade and geopolitical tensions.
- A slowdown in the industrial production of advanced economies (the US, Europe, and Japan).
- Reduction in the manufacturing activities, the lowest in a decade, and slow down in hiring rates by the private sector.
- The macroeconomic performance of major emerging market economies has slowed down and can affect retail sales and industrial production growth (Chinese, Russia, Brazil, and South Africa).
- Crude oil prices disruptions due to geopolitical conflicts.
- Protectionist policies across the globe have been worsening the global growth process.
- The US-China Trade War.
- Worsening of bond yields due to the European Central Bank’s cut in the deposit rate.
The Domestic Economy
- A slowdown in the Private Final Consumption Expenditure (PFCE) to an 18-quarter low.
- On the supply side, the Gross Value Added (GVA) growth decelerated to 4.9% in Q1: 2019-2020, pulled down by the manufacturing growth.
- Growth in the services sector was stalled by the construction sector.
- The initial delay in the onset of the south-west monsoon.
- Industrial activity, measured by the Index of Industrial Production (IIP), weakened in July 2019.
- The contraction of production of capital goods and consumer durables.
- The rise of food inflation and fuel prices into deflation
- In Q2, merchandise exports remained weak in July and August 2019, caused by lower shipments of engineering goods, petroleum products, gems and jewellery and cotton yarn.
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.