The Reserve Bank of India (RBI) monetary policy committee on Thursday RBI lowered the GDP growth targets sharply to 7 percent from 7.2 percent for FY20 on weak global scenario and dip in private consumption.
"The MPC (monetary policy committee) notes that growth impulses have weakened significantly A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern," RBI said its policy resolution.
In the April monetary policy, the growth of Gross Domestic Product (GDP) for 2019-20 was projected at 7.2 percent - in the range of 6.8-7.1 percent for the first half of the fiscal and 7.3-7.4 percent for the second part - with risks evenly balanced.
Data for January-March quarter:2018-19 indicate that domestic investment activity has weakened and overall demand has been weighed down partly by slowing exports, the RBI said after the meeting of the MPC, which decides on key policy rates.
The Reserve Bank also raised the retail inflation forecast marginally to 3-3.1 percent for the first half of the current fiscal, tracking uptick in food prices - mainly vegetables, albeit expectations of a normal monsoon this year.
In its first bi-monthly policy for FY20 in April, RBI had forecast the retail inflation to be hovering in the range of 2.9-3 percent for six months till September.
However, the retail inflation projection for the second half of this fiscal has been cut to 3.4-3.7 percent as against RBI's previous projection of 3.5-3.8 percent.
RBI cut its policy interest rate by 25 basis points on Thursday, in a widely expected move and shifted its policy stance to “accommodative” from “neutral” to boost a slowing economy. One basis point is a hundredth of a percentage point.
The six-member monetary policy committee (MPC) cut the repo rate to 5.75 percent as predicted by all 5 economists polled by
CNBC-TV18 last week. GDP GDP growth for FY20 revised to 7 percent versus 7.2 percent projected earlier. GDP growth for 1HFY20 revised to 6.4-6.7 percent versus 6.8-7.1 percent forecast earlier. GDP growth for 2HFY20 revised to 7.2-7.5 percent versus 7.3-7.4 percent forecast earlier. On Growth Domestic investment activity weakened; overall demand weighed down partly by slowing exports. Weak global demand with an escalation in trade wars may further impact India’s exports and investment activity. Private consumption, especially in rural areas, weakened in recent months. Political stability, high capacity utilisation auger well for the economy. Uptick in business expectations in Q2, buoyant stock market conditions auger well. Higher financial flows to the commercial sector augur well for investment activity. Growth impulses have weakened significantly as reflected in a further widening of the output gap. Sharp slowdown in investment activity, continuing moderation in private consumption growth concerning. Scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand. Scope for the MPC to accommodate growth concerns to reinvigorate private investment activity. On Inflation Consumer Price Index (CPI) inflation forecast for 1H FY20 revised to 3-3.1 percent versus 2.9-3 percent projected earlier. CPI Inflation forecast for 2H FY20 revised to 3.4-3.7 percent versus 3.5-3.8 percent projected earlier. Upward bias to inflation outlook due to sharper than expected summer pick-up in vegetable price. Significant weakening of domestic and external demand conditions impart downward bias. Crude prices have continued to be volatile, but impact on CPI has been muted. Near-term household inflation expectations have continued to moderate. Risks to inflation projection from uncertainties relating to the monsoon. Risks to inflation forecast from unseasonal spikes in vegetable prices. Risks to inflation forecast from international fuel prices and their pass-through to domestic prices. Other risks include geopolitical tensions, financial market volatility, fiscal scenario. Liquidity Liquidity in the system turned into an average daily surplus of Rs 66,000 crore in early June after remaining in deficit during April and most of May due to restrained government spending. RBI injected liquidity of Rs 70,000 crore in April and Rs 33,400 crore in May on a daily net average basis under the LAF. It conducted two OMO purchase auctions in May amounting to Rs 25,000 crore and a US dollar buy/sell swap auction of US$ 5 billion (Rs 34,874 crore) for a tenor of three years in April to inject durable liquidity into the system. The weighted average call money rate (WACR) – the operating target of monetary policy – remained broadly aligned with the policy repo rate: it traded above the policy repo rate (on an average) by 6 bps in April, but below the policy repo rate by 6 bps in May. The Reserve Bank has announced that it would conduct an OMO purchase auction of Rs 15,000 crore on June 13, 2019. Transmission of the cumulative reduction of 50 bps in the policy repo rate in February and April 2019 was 21 bps to the weighted average lending rate (WALR) on fresh rupee loans. However, the WALR on outstanding rupee loans increased by 4 bps as the past loans continue to be priced at high rates. Interest rates on longer tenor money market instruments remained broadly aligned with the overnight WACR, reflecting near full transmission of the reduction in policy rate. India’s foreign exchange reserves were at US$ 421.9 billion on May 31, 2019.
Follow our live blog to get the latest updates on RBI MPC outcome.