After slashing the key policy rate — Repo rate — four times in a row this year to revive growth and investments, Reserve Bank Governor Shaktikanta Das on Thursday hinted that there could be more reduction in the policy rate in the near future in the wake of low inflation and the deepening slowdown in the economy.
“When we see that the price stability is maintained and inflation is much below the 4-per cent mandate and is expected to be so in the next 12-month horizon, there’s a room for more rate cuts especially when growth has slowed down,” Das said at the India Economic Summit of Bloomberg. With inflation under control and growth rate declining, the central bank has reduced the Repo rate by 110 basis points to 5.40 per cent in calendar year 2019, with the last cut being the unconventional 35-basis point reduction on August 7.
The Governor’s comments have come at a time when the first quarter GDP growth slowed to a 6-year low of 5 per cent and last month exports showed degrowth for the first time. Many sectors, including automobiles, have witnessed demand slowdown, prompting the Centre to step in with measures to tackle the deepening slowdown. Total advance tax collection in the first half stood at Rs 5.5 lakh crore compared to Rs 5.25 lakh crore in the same period last year, a growth of just 4.7 per cent against a target of 17.5 per cent. However, Das refused to give any estimate or forecast about the growth, saying, “our teams are analysing the data… wait till October 4 when the monetary policy will be announced.”
Das said that the government’s fiscal headroom is “very limited”. “I think the fiscal space is itself very limited. Fiscal deficit at 3.3 per cent and borrowings by PSUs both put together there is very little space. But what is the internal position of the government with regard to tax collection, how much expenditure is likely to be materialised, that is something the government has to view,” he said.
“On the fiscal side the government has by and large remained prudent. They have not announced any counter cyclical measures in going for a fiscal expansion. They have taken some administrative and regulator measures with regard to auto sector, exports and banking,” he said.
There is little fiscal space for the government to unveil any countercyclical measures to boost the sagging growth and the only way to revive the growth engine is to front-load the budgeted capital expenditure by the government, he said, hinting that an accommodative monetary policy can help salvage the situation.
“The government must front-load the budgeted spending as it has little fiscal space for any countercyclical measures to boost growth,” he said.
Monetary policy may lift growth as fiscal space limited
In the backdrop of stretched fiscal position of the Central government, the RBI indicated that the banking regulator could do the heavy lifting to push growth that has fallen to 25-quarter low of 5 per cent in April-June. Low inflation and stable prices could help the RBI in providing a monetary policy stimulus by sharply cutting rates, thereby invigorating consumption and investment activity.
When asked his view on the “grim” state of the economy, the RBI Governor said the mood of gloom and doom won’t help fix the problems. “You mention the economy being grim enough … I don’t want to enter into any adjective to describe the current state of the economy. There are challenges but one also has to look at the opportunities that are available. And the focus has to be on the measures to overcome the challenges. That should be the focus of every stakeholder in the economy,” he said.
The Governor expressed the hope that the ongoing crisis in Saudi Arabia that has spiked crude prices to multi-year highs will have limited impact on inflation and fiscal numbers.
On the global scenario, Das said the international environment is clouded with challenging conditions.
“Global growth is slowing down and central banks across the world are countering it by easing monetary policy. But, there is no recession yet,” he said.