The central bank slashed the GDP growth forecast by 190 basis points to 5 per cent over the last two policy statements in a matter of two months — its sharpest revision in at least a decade indicating its inability to foresee the deepening slowdown in the economy.
Also, as inflation concerns grew, the RBI’s monetary policy committee took a pause, leaving the repo rate — the rate at which RBI lends to commercial banks — untouched at 5.15 per cent for the first time in 10 months.
While the RBI revised its GDP projection by 1.9 percentage point in a matter of two months, it has brought down its projection by 2.4 per cent for the year, in a matter of 10 months or five monetary policy reviews.
Even in the year 2008-09 — the year of the global financial crisis – and in 2012-13, when the GDP for the fourth quarter hit 4.3 per cent, the RBI’s projections were more realistic and forecast revisions more rational.
RBI data shows that this is the sharpest cut in GDP projection by the central bank, in at least a decade. In the financial year 2011-12 and 2012-13 when GDP growth rate stayed low at 5.2 per cent and 5.5 per cent respectively, the central bank followed a more reasonable and staggered downgrade path.
In fact, in 2012-13, while the central bank first projected a growth rate of 7.3 per cent in April 2012, it revised its projections downward to 6.5 per cent in July, 5.8 per cent October and then to 5.5 per cent in January 2013. It had revised its projection in 2012-13 by 1.8 percentage points from 7.3 at the beginning of the year to 5.5 per cent towards the end of the year.
While RBI has deviated from its initial forecast by a huge margin this year, despite having access to all available economic data and variables, experts say that RBI – which has a strong research department – is struggling with GDP forecast just as everybody else.
On Thursday, RBI slashed the real GDP growth for 2019-20 downwards from 6.1 per cent in the October policy to 5 per cent, saying that it can even go down to 4.9 per cent.
In the October policy review, the central bank cut the GDP growth for 2019-20 to 6.1 per cent from 6.9 per cent forecast in the August policy.
The lowering of growth rate by the RBI came after the government last week said the GDP growth in September 2019 quarter had plunged to 4.5 per cent, the lowest since the three months ended March 2013.
In its 5th bi-monthly policy released on Thursday, the RBI indicated more downside risks. “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,” it said.
“Various high frequency indicators suggest that domestic and external demand conditions have remained weak,” the RBI further said. Analysts don’t rule out further downward revision in the GDP estimate if demand doesn’t pick up in the economy.
The RBI’s monetary policy panel said GDP growth for the second quarter of 2019-20 turned out to be significantly lower than projected. “Based on early results, the business expectations index of the Reserve Bank’s industrial outlook survey indicates a marginal pickup in business sentiments in Q4,” the RBI said.
Said Rajesh Narain Gupta, Managing Partner, SNG & Partners: “Although the MPC has maintained an accommodative stance leaving room for future policy rate interventions, mere policy manoeuvrability will not be enough to reverse the economic slowdown, boost GDP numbers and steer the economy on a higher growth curve. The priority will need to be on adopting a holistic and multi-dimensional approach to tackle the structural and cyclical challenges facing the Indian economy.”
Analysts said the priority focus will have to be on kick-starting the consumption cycle, bolster private investment and expenditure and improve the financial health and credibility of lending institutions. “The need of the hour is to go beyond mere policy mandates and create a conducive climate for ensuring inclusive economic growth and create sustainable pathways for future economic growth and development,” Gupta said.
Shishir Baijal, Chairman & MD, Knight Frank India, said: “The industry expectation was that slowing economic growth would take precedence in RBI’s policy decision. Hence, the RBI’s decision to not lower interest rate has come as a surprise and a bit of a disappointment. Lower interest rate would have helped push up credit demand and investment in the economy, aiding overall economic growth.”