Updated: October 5, 2019 11:05:31 am
A re-reading of the Reserve Bank of India’s monetary policy statements over the last six months shows the central banker has downgraded the GDP growth projection for 2019-20 by more than a full percentage point — from 7.2% in April to 6.1% now.
Its commentary on the state of the economy and its outlook too has qualitatively changed — from being “optimistic” in April to expressing “concerns” in August and calling for “intensified efforts to restore the growth momentum” in October.
Paring down the GDP growth forecast for the current financial year by 80 basis points to 6.1% on Friday from 6.9% in August, the RBI’s Monetary Policy Committee said while various high frequency indicators suggested domestic demand conditions remained weak, there were indications of muted expansion in demand conditions in the third quarter.”
“While recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum,” the RBI said in its Friday statement.
The narrative in October picks the threads from August when the RBI spoke of the deteriorating demand situation. It had cut the repo rate by an unconventional 35 basis points then, and said this would help close the “negative output gap”. But then, on Friday it acknowledged “the negative output gap has widened further”.
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A negative output gap indicates surplus capacity in the economy. A widening of this gap means the industry is unable to use much of its capacity due to poor demand.
Six months back in April, the tone of RBI statement was quite buoyant. It had then said private consumption remained resilient, and was expected to get a “fillip from public spending in rural areas and an increase in disposable incomes of households due to tax benefits”. The Budget, announced on February 1, had given only a marginal rebate to those earning up to Rs 5 lakh a year. “…business expectations continue to be optimistic”, the RBI had said in the April policy review in the midst of Lok Sabha elections.
Two months later, the optimism faded. In June, it said domestic investment activity had weakened and overall demand had been weighed down partly by slowing exports. Reducing repo rate by another 25 basis points, it also said “private consumption, especially in rural areas, has weakened in recent months”.
In August, the mood had turned sombre. The RBI was too worried over slowdown in domestic demand conditions. “Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture,” it observed.
Meanwhile, the monetary policy committee which decided to cut rates Friday for the fifth consecutive time this calendar year, admitted that monetary transmission has remained staggered and incomplete. Infact, a look at RBI’s successive statements shows the transmission in weighted average lending rate (WALR) on fresh rupee loans of commercial banks has progressively slowed. The transmission was 21 basis points out of the cumulative 50 basis point cut in repo rate in February and April 2019. After a 25 basis point cut in repo rate in June (cumulative of 75 basis points since February), the total transmission could rise only to 29 basis points.
There has, however, been no transmission post the 35 basis point cut in repo rate in August. “As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps,” the RBI said.
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