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Published on 5/04/2019 12:07:15 PM | Source: Choice Broking Pvt Ltd

`Inflation and GDP forecasts revise downward` - Choice Broking

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‘Inflation and GDP forecasts revise downward’

RBI reduces policy repo rate by 25 bps to 6.0%

* Policy repo rate under the liquidity adjustment facility (LAF) reduced by 25 bps to 6.0%

* Consequently, the reverse repo rate under the LAF adjusted to 5.75%. Marginal standing facility (MSF) rate and Bank Rate adjusted to 6.25%.

* Policy stance maintained at ‘neutral’

* The RBI revised lower the CPI inflation forecast to 2.4% in Q4FY19, 2.9-3.0% in H1FY20 and 3.5-3.8% in H2FY20.

* MPC expressed concern over weakening economic activity. GDP growth revised downward to 7.2% for FY20.

* Allowed banks to use 2% of excess of SLR for LCR in order to boost liquidity in the system.

* RBI deferred external benchmarking of retail loans for the time being.

 

The Reserve Bank of India (RBI), in its first bi-monthly monetary policy statement’ 2018-19, cut the policy repo rate by 25 bps to 6.0%, the lowest level of rate since Jun 2018. Meanwhile, contrary to the market expectation, the central bank has kept its monetary policy stance at ‘neutral’ amidst uncertainties over the future trajectory of inflation. This is the second consecutive rate cut by the RBI to boost the domestic economic growth which lost some steam in the last quarter. India’s GDP grew at 6-quarter low of 6.6% in Q3FY19 v/s 7.0% in Q2FY19. To boost the liquidity in the economy, the RBI allowed banks to use of an additional 2% of SLR bucket for purpose of liquidity coverage ratio (LCR). The move is expected to release around Rs2 lakh crore for additional lending. Meanwhile, the apex bank deferred the external benchmarking of retail loans for further consultations.

 

Four out of six members of MPC voted for 25 bps rate cut

Five members of MPC voted to keep stance at ‘Neutral'; while one member voted for ‘Accommodative’ stance

MPC’s view on inflation

Monetary policy committee (MPC) expects inflation to remain low in the near term and subsequently revised downward its inflation target to 2.4% in Q4FY19, 2.9-3.0% in H1FY20 and 3.5-3.8% in H2FY20. Continued deflation in key food items will have a bearing on near term outlook, in addition estimated food grain production for FY19 at 281.4 MT is remained sufficient. Core inflation as well as crude oil prices have also shown easing trending over the past few months. As per the RBI’s survey of households, inflation expectations declined 40 bps each for the three months ahead and for the one year ahead horizon. However the uncertainty for inflation trend in the medium to long term forced MPC to keep neutral monetary policy stance giving the committee room to move in either direction based on incoming data. The biggest upside risk that the MPC highlighted is probability of EI Nino effect in 2019. Other upside risks to inflation beyond near term include possibility of abrupt reversal of vegetables prices, sustainability of core inflation over 5%, and uncertainty over crude oil prices due to OPEC production cut.

 

GDP growth revises downward to 7.2% for FY20

As per MPC, the output gap remains negative and domestic activity is facing headwinds especially on global fronts. Slowdown in production and imports of capital goods indicates sign of weakening domestic investment activity. While the latest data indicates slowdown in public and private consumption, moderation of global economy growth may further impact India’s exports. On the positive front, Capacity utilisation (CU) in the manufacturing sector, measured by the RBI, improved to 75.9% in Q3 from 74.8% in Q2 exceeding its long-term average. The business assessment index of the industrial outlook survey (IOS) also points to an improvement in overall sentiments in Q4. MPC expects private consumption to get a fillip from public spending in rural areas and increase in disposal income of households due to tax benefits. Manufacturing and services PMI continue to remain in expansionary phase. The RBI revised lower FY20 GDP growth forecast to 7.2% (7.4% projected earlier) in the range of 6.8-7.1% in H1FY20 and 7.3-7.4% in H2FY20 with risks evenly balanced.

 

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