GDP forecast scaled down

Mumbai: The RBI Monetary Policy Committee has taken a unanimous decision to keep the policy repo rate unchanged at 5.15 percent, causing jitters in the market.

More important, the RBI has acknowledged its helplessness in reversing the slowdown in growth through the text book solution of further lowering the interest rate.

Even more worrisome is that the central bank has lowered its GDP growth forecast, which is expected to be in the range of 4.9-5.5 per cent in the second half of 2019-20. However, there is recognition of “monetary policy space for future action”

Speaking to reporters after the release of the policy statement, Governor Shaktikanta Das said the RBI will monitor how inflation pans out before taking further policy action.

"The timing of rate cuts is very important in order to optimize its impact," he added. The RBI cannot "mechanically" keep cutting interest rates every time, he added.

From the consumer’s standpoint, what is of concern is that the RBI has scaled upwards its inflation forecast to 5.1-4.7 per cent in the second half of 2019-20. According to FPJ analyst

(see Business page for full report) the underlying inflation measured in terms of Consumer Price Index (both rural and urban) swelled to 6.9 per cent in October 2019 – “a 39 month high”- due to an alarming increase in vegetable prices.

For instance, onion prices, on top of an increase of 45.3 per cent in September 2019, further rose to 19.6 per cent in October. Incidentally, inflation expectation, measured in terms of household expectation as revealed by the RBI survey of November 2019, recorded an increase by 120 basis points over the 3 months horizon and 180 basis points over a one-year horizon.

From the foregoing, we may conclude that the growth-inflation dynamics have witnessed some changes and revival of growth is now not critically dependent on interest reduction.

(To download our E-paper please click here. The publishers permit sharing of the paper's PDF on WhatsApp and other social media platforms.)

Free Press Journal