The Reserve Bank of India, on Wednesday, did the sensible thing: It left its key policy lending rates unchanged while maintaining a “neutral” monetary policy stance. The upside risks to inflation — rising international oil prices, uncertainties in pricing behaviour of firms post-GST and a patchy monsoon whose impact on the current kharif and upcoming rabi crop is still unclear — did not leave it with many alternatives. In ordinary times, the central bank may have even raised rates. That it refrained from such hawkishness is due to the extraordinary concerns over growth, proof of which is the unprecedented scaling down of growth estimates. The RBI expects the economy to grow by a mere 6.7 per cent in 2017-18, which is a sharp downward revision from its 7.3 per cent projection made two months ago. This 60 basis point reduction in growth estimates is far more significant than the mild increase in consumer price inflation projection for the second half, from the 4-4.5 to a 4.2-4.6 range.
According to the central bank, the loss of momentum in the first quarter of 2017-18 and the first advance estimates of kharif foodgrain production are early setbacks which impart a downside to the outlook. The implementation of the GST so far appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This in turn could further delay the revival of investment activity already impacted by the twin balance-sheet problem. The upside to the growth projections could be in the form of a boost to household consumption owing to upward revisions in salary and allowances by states and expectations that the glitches related to GST may be resolved swiftly. That may, however, be negated by the fact that input costs are now rising which in turn could impact margins of firms. A weakening consumer confidence as reflected in an RBI survey on the outlook on employment, income, prices and spending further clouds the horizon.
What should also stoke concern is the fact that in terms of exports, one of the growth engines, India lags behind other emerging market peers. Coupled with that are the risks from the normalisation of monetary policy by the US Federal Reserve later this year. That may well pose the risk of outflows considering that foreign portfolio investment in India has largely been in debt. Add to that the uncertainty on inflation and in such a scenario, a lowering of interest rates may not be useful though it could be argued that a deeper cut earlier in the year could have helped. That leaves much of the heavy lifting now to be done by the government — starting with speedily resolving the implementation problems linked to GST, getting stalled projects off the ground, and infusing more capital for banks to enable them to lend to firms, especially small and medium enterprises hurt most by the slowdown.
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