These are the trying times for India as a country, as well as an economy.
As COVID-19 still looms large, the government and the people are trying their best to get a move on.
Purely talking from an economic perspective, the situation remains tricky. but it could have been far worse if not for Reserve Bank of India (RBI).
The pandemic and its impact came much later, the downcycle in the economy had started much earlier. Amid this uncertainty, RBI emerged as one institute that bore the weight of a dwindling economy entirely on its own.
Starting from rate cuts to the government’s plan to monetize debt, RBI ensured that the market remains in surplus liquidity. This is achieved even at the expense of sacrificing its prime mandate of maintaining inflation of 4% within a band of +/- 2%.
So, when an institute of this stature presents its outlook, it becomes imperative for market participants to pay attention. Today, we have made one such attempt to decode the minutes of RBI's MPC meeting and get a glimpse of the future outlook of the economy.
1) Agriculture a bright spot :
RBI assessed that the agricultural sector has emerged as a bright spot amid the pandemic. The total area sown under Kharif crops on July 31 was 5.9% higher than the average over the period 2014-15 to 2018-19.
The outlook for rabi season also looks promising. These developments resulted in a positive impact on fertilizer production and sales of tractors, motorcycles and fast-moving consumer goods in the rural economy.
The pace of contraction of industrial production is arrested but barring pharma, all manufacturing sub-sectors still remains in negative territory.
Services sector activities have also seen modest resumption. However, like production, it also remains at levels lower than a year ago.
Domestic air traffic and cargo traffic improved but construction and related activities – cement production and finished steel consumption- remained tepid.
RBI governor Shaktikanta Das in his commentary said that the sale of automobiles (wholesale), electricity generation and issuance of e-way bills indicated that a moderate recovery was taking place in the domestic economy. Cement and steel production also saw some moderation in the pace of contraction to 6.9% and 33.8% respectively, in June as compared to the previous two months.
However, initial signs of recovery in June have again slumped after a renewed spate of infections forced re-imposition of lockdowns in several states and cities.
2) Inflation likely to ease in the second half :
Headline consumer price index (CPI) inflation, inched up to 6.1% in June 2020 from 5.8% in March 2020. This resulted in a sharp upward revision of food inflation. However, RBI admitted that the headline CPI prints of April-May, 2020 require more clarity in the face of data collection related challenges.
According to MPC member Dr Pami Dua, a bumper rabi crop and a moderate increase in minimum support prices for the Kharif crops augur well for inflation.
She expects headline print to remain elevated in Q2 and then moderate in the second half of the current fiscal year. However, pressure on vegetable prices, continued supply chain disruptions, high taxes on petroleum products present upside risks to inflation.
Commandable job at liquidity management:
Efficient liquidity management is perhaps the most vital task the RBI has accomplished during these trying times. The banks are finally transmitting the rate cuts to the borrowers, resulting in lowering interest rates in money, bond and credit markets.
RBI has cut the repo rate by 250 basis points since February 2019. It has kept the financial flow intact at a time when banks remained highly risk-averse. Systemic liquidity remains in large surplus at Rs 9.57 lakh crore or 4.7% of GDP due to the conventional and unconventional measures by the Reserve Bank.
As uncertainties loom over, RBI indicated that the economy continues to need support. In pursuit of this objective, the central bank is prepared to maintain accommodative stance as long as it is necessary.
However, the RBI is likely to opt for a prolonged status quo on rate cuts. The minutes reveal that RBI could decide to hold further rate cuts and use it judiciously to maximize the beneficial effects.
Key takeaways:
Despite the abundant liquidity, credit growth continues to remain muted.
According to MPC member Dr Chetan Ghate, the MSME sector continues to face a credit crunch, resulting in a higher cost of credit for them. Reviving the credit cycle will be the major challenge for RBI in the coming months.
RBI has done a commendable job to steer the country through the crisis so far. Lockdown and supply-side related challenges continue to remain unabated but RBI's minutes relevels its preference for growth and willingness to sacrifice inflation target in short to medium term. It is a step taken in the right direction as we maintain cautiously #Teji outlook on upcoming MPC meets.
