RBI Reduced GDP Forecast To 6.7% & Will Be Better In Next Quarter

RBI Reduced GDP Forecast To 6.7% & Will Be Better In Next Quarter

The Reserve Bank of India kept key rates on hold on Wednesday, while reducing its GDP forecast for the fiscal year ending March 2018 to 6.7% from 7.3%. It put the onus of reviving the economy on the government, calling for structural reforms.

Announcing the decision of the Monetary Policy Committee on Wednesday, RBI governor Urjit Patel cautioned against a fiscal stimulus, pointing to the combined (central and states) fiscal deficit of 6%. “We should be very cautious lest fiscal actions undercut macroeconomic stability,” he said. The government has indicated that it is planning measures to revive the economy, raising expectations of a spending boost.

Explaining the decision to hold rates, Patel said he expected inflation to move up to 4.2% to 4.6% in the second half. Besides rising crude oil prices, wage hikes for government employees are expected to fuel inflation.

Patel, however, said the door was not shut on future rate cuts as there was also a possibility that lower commodity and food prices could keep inflation down.

While the MPC voted to hold rates, RBI reduced the statutory liquidity ratio (SLR) – the mandated portion of deposits that banks must park in government bonds – from 20% to 19.5%. This will provide banks more room to lend as and when credit demand picks up.

“The MPC noted that implementation of GST appears to have rendered short-term prospects uncertain, possibly delaying the investment activity which is already hampered by stressed balance sheet of banks,” said Patel.

Government sources cited RBI’s calculations to argue that growth would significantly pick up in the quarters ahead after slowing to a three-year low of 5.7% during April-June 2017.

They said growth is estimated to accelerate to 6.4% during the September quarter, followed by 7.1% and 7.7% over the last two quarters of the current financial year that ends in March.

Officially, however, the government limited itself to saying that it had “noted” the MPC’s “downward revision of growths as well as a slight upward revision of retail inflation”.

Bankers too said the policy presented an optimistic picture. Keki Mistry, vice chairman and CEO, HDFC, said that considering the first quarter growth numbers have come in at 5.7%, the third and fourth quarters would need to have improved growth rates to achieve 6.7% for FY18.

According to RBI, the outlook for agriculture is favorable with a nearnormal monsoon. The outlook for services has also brightened with several indicators of underlying activity showing growth.

While there is concern over weakness in manufacturing in the first quarter, more recent data suggests that the outlook might be brighter.

Among the reforms that were needed to kick start growth, Patel highlighted a concerted drive to close the severe infrastructure gap; restarting stalled investment projects, particularly in the public sector; enhancing ease of doing business, including by further simplification of the GST; and ensuring faster roll out of the affordable housing program with time-bound single-window clearances and rationalisation of excessively high stamp duties by states.

The central bank also indicated that there was a need for deleveraging by corporates and recapitlisation of banks for an improvement in investment. The MPC voted 5:1 in favour of holding rates. The sole member who voted in favour of a cut was Ravindra H Dholakia, professor, Indian Institute of Management, Ahmedabad.

Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published. Required fields are marked *