The RBI Monetary Policy Committee (MPC) has decided to keep the policy repo rate unchanged at 6%. (Reuters)
Though there are divergent views on the need for interest rate cut to boost growth, the Reserve Bank of India’s stance of holding the rate for now needs to be judged on the basis of its projection of inflation and growth going ahead.
The RBI Monetary Policy Committee (MPC) has decided to keep the policy repo rate unchanged at 6%. It has pointed out that: “The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.”
While the RBI decision on avoiding a rate cut at this juncture is not surprising despite the government and majority of experts demanding this to spur growth, it is the growth outlook of the central bank that will help prime minister Narendra Modi and finance minister Arun Jaitley in countering the forecasts of an impending crash landing of the economy.
To begin with, it has clearly outlined the concern areas, and has then revised the growth projection to a realistic level, which can be taken as a benchmark for all discussions related to the steps required for reviving growth in the coming quarters, after it slipped to 5.7% in the first quarter of FY18.
“….. the loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook. The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term”, RBI has said in its outlook, pointing out that, “This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporate”.
The good news is that though the “Consumer confidence and overall business assessment of the manufacturing and services sectors surveyed by the Reserve Bank weakened in Q2 of 2017-18; on the positive side, firms expect a significant improvement in business sentiment in Q3”.
All this has led to RBI revising its projection of real GVA growth for 2017-18 to 6.7% from the August 2017 projection of 7.3%.
To counter criticism on growth concerns, the MPC has clearly cut out the task for the government.
While reforms and measures including GST, demonetisation and resolution of NPAs will start yielding results in the medium- to long-term, reinvigorating investment activity will play the key role here.
Recapitalising public sector banks adequately will ensure enhanced credit flow to the productive sectors, while focus on infrastructure, faster roll-out of affordable housing and improvement in ease of doing business scenario, including the resolution of GST issues quickly, will also support growth.
Overall, RBI growth outlook has done well by signaling that despite concerns, there is nothing to panic on the economic growth front.
