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February 07, 2019

Focus shifts to growth

The development


  • Stumping status quo-ists and clearly plumping for growth, the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) slashed policy rate by 25 basis points in a 4-2 vote in its sixth bi-monthly policy statement for fiscal 2019.
  • The repo rate now stands at 6.25%, and the reverse repo and marginal standing facility (MSF) rates, at 6.00% and 6.50%, respectively. The MPC also eased its policy stance to neutral from calibrated tightening, in a unanimous decision.
  • Today’s policy decisions were based on the following factors:
    • Undershooting of inflation in the last few months and a benign trajectory predicted in the coming year ii) Supporting domestic growth, which could be under stress, as suggested by some recent high frequency indicators, amid a slowing global economy. With this move, the monetary policy now complements the fiscal policy in supporting growth.
      • In the last five months, consumer price index (CPI)-based inflation has remained below the RBI’s medium-term target of 4%, reaching an 18-month low of 2.2% in December 2018, largely attributed to significantly low food inflation. The MPC projects headline inflation to remain soft in the near term. It has revised its projections downward as follows: 2.8% in fourth quarter of fiscal 2019, 3.2-3.4% in first half and 3.9% in third quarter of fiscal 2020.
      • The MPC noted that, with consumption demand slowing, the Central Statistics Office (CSO) has estimated fiscal 2019 GDP growth at 7.2%, same as that in fiscal 2018. It further noted that some indicators of investment demand such as production and imports of capital goods contracted in November-December and credit flows to industry remain muted. While citing risks from slowdown in global demand amid ongoing trade tensions, the MPC still forecasts a reasonably strong GDP growth of 7.4% for fiscal 2020. CRISIL expects GDP to grow a tad lower at 7.3% in fiscal 2020.