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RBI monetary policy statement today: Assessing the extent of the slowdown

Growth in gross domestic product unexpectedly slowed in the April-June quarter and economists have cut estimates for the year through March to 6.8 per cent from 7.3 per cent, the slowest pace in four years.

By: Bloomberg | Mumbai | Published: October 4, 2017 9:05 am
RBI, monetary policy, rbi rate cut, reserve bank of india, urjit patel Cracks have emerged within Governor Urjit Patel’s six-member monetary policy committee over the recent months as slower growth and faster inflation complicate policy choices.

With the Reserve Bank of India expected to keep interest rates at a seven-year low on Wednesday, investors will parse its commentary to assess the extent of the economy’s slowdown.

The repurchase rate will stay at 6 per cent, according to 31 of 32 economists in a Bloomberg survey, with one seeing a cut to 5.75 per cent. The RBI will also probably lower its growth forecast and analysts want to know if that will change its inflation outlook, which had been predicting a rebound in price pressures.

Cracks have emerged within Governor Urjit Patel’s six-member monetary policy committee over the recent months as slower growth and faster inflation complicate policy choices. Prime Minister Narendra Modi’s clampdown on cash and uncertainty stemming from a newly introduced goods and services tax has hurt the economy, stoking speculation of a fiscal stimulus.

“The worsening of recent macroeconomic data has changed the narrative around India from positive to negative,” analysts at Nomura Holdings Inc., including Sonal Varma, wrote in an Oct. 2 report. While the optimal solution includes cleaning up a pile of bad loans and kick starting investment, “this may sit uneasy given the 2019 election cycle which requires both sentiment and animal spirits to be buoyant within the next year,” they said.

The monetary authority will announce its decision at 2:30 p.m. in Mumbai followed by a press conference 15 minutes later.

Conflicting Indicators

Growth in gross domestic product unexpectedly slowed in the April-June quarter and economists have cut estimates for the year through March to 6.8 per cent from 7.3 per cent, the slowest pace in four years. At the same time, inflation has picked up towards the RBI’s medium-term target of 4 per cent.

If resurgent price pressures limit the RBI’s room to ease, the government could be forced to boost spending, imperiling its budget deficit target and risking the wrath of rating companies that downgraded China last month. The fiscal shortfall hit 96 per cent of the full-year goal in the first five months of the year, compared with 76 percent last year.

India cut a domestic levy on gasoline and diesel late on Tuesday, which Nomura estimates will directly lower consumer-price inflation by about 8-9 basis points. However, the government will also lose about 260 billion rupees each year in revenues.

Markets Concerned

The slowdown risks hurting foreign investment into India with the rupee hitting a six-month low last week. Foreign funds sold $1.8 billion of Indian stocks last month, the biggest outflow this year, making it harder to bridge India’s widening current account deficit.

The shortfall in the broadest measure of trade was at $14 billion April-June, compared with $3 billion the previous quarter. New export orders fell in September, a private survey showed on Tuesday.

“Although a slightly lower rate of the rupee will bode well for sluggish Indian exports, it is highly unlikely that the RBI will cut rates amid an already falling rupee,” said Hugo Erken, senior economist at Rabobank International.

Governor Patel and his deputy Viral Acharya are also wary of the risks to inflation from a growing trend of farm loan write offs by state governments. Anger over falling farm incomes has spilled onto the streets as India’s slowdown worsens conditions for the bulk of its population, which relies directly on agriculture for its livelihood.

“The latest sell-off in Indian markets in late September reflected the multiple challenges faced by the government,” said Radhika Rao, an economist at DBS Bank Ltd. in Singapore. “The environment remains challenging, from recovering oil prices and more global central banks looking to roll back their stimulus policies in the coming years.”

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  1. Samuel Diawson
    Oct 4, 2017 at 12:51 pm
    Finally, Hon. PM Shree Modi Ji's mess up of India's booming economy has come out in the open!! How he spoke ill against many great minds in the US Senate and Harvard School of Business when they were strongly advising him against Demonetization and even against Raghuram Rajan hey... He then tried to concoct a magic potion on Indian economy- like Merlin the Wizard which worked only for 1 month and then GDP fell flat and flaccid in the face of all Indians.. Shameful really need to get UPA Scam-Raj back into power soon in Year 2019 I say!!
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    1. A
      a d
      Oct 4, 2017 at 10:41 am
      All this is done not to increase the interest rates and also control of these meetings by F M Jaitley. All done under his instructions to get official nod to rob the poor.
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      1. Ravi Ok
        Oct 4, 2017 at 10:11 am
        Do we even need RBI?Dismantle it. Our PM knows everything about economics.All countries in world,every economist in world takes tuitions from out PM.He singlehandedly developed entire modern economics from 1500 to 2017. We don't need RBI-Department of commerce.Shut them down. In fact,we indians urge americans to shut down US fed,all economics departments in universities .We also request EU to shut down EU ECB-WB-BIS-IMF. Let indians be in charge of world economics.
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        Adda