RBI: High frequency indicators weak

The Monetary Policy Committee (MPC) at its meeting on 5 December 2019 decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.15%.

Consequently, the reverse repo rate under the LAF remains unchanged at 4.90%, and the marginal standing facility (MSF) rate and the Bank Rate at 5.40%, said the Reserve Bank of India after its MPC meeting.

The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target, said RBI.

“These decisions are in consonance 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.

GDP growth for second quarter of 2019-20 turned out to be significantly lower at 4.5% than projected, acknowledged RBI.

The 4.5% GDP growth extended a sequential deceleration to the sixth consecutive quarter. Real GDP growth was weighed down by a sharp slowdown in gross fixed capital formation (GFCF), cushioned by a jump in government final consumption expenditure (GFCE). Excluding GFCE, GDP growth would have been at 3.1%, said RBI.

Growth in real private final consumption expenditure (PFCE) recovered from an 18-quarter trough. The drag from net exports eased on account of a sharper contraction in imports than in exports.

But RBI accepted that various high frequency indicators suggest that domestic and external demand conditions have remained weak.

Based on the early results, the business expectations index of the Reserve Bank’s industrial outlook survey indicates a marginal pickup in business sentiments in Q4.

On the positive side, however, monetary policy easing since February 2019 and the measures initiated by the Government over the last few months are expected to revive sentiment and spur domestic demand, said RBI.

Taking into consideration these factors, real GDP growth for 2019-20 is revised downwards from 6.1% in the October policy to 5.0% – 4.9%-5.5% in the second half the year and 5.9%-6.3% for the first half of 2020-21.

While improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in revival of domestic demand, a further slowdown in global economic activity and geo-political tensions are downside risks, said RBI. Fiinews.com