INSUBCONTINENT EXCLUSIVE:
RBI's monetary policy committee (MPC) on Thursday slashed repo rate by 25 basis points to 6 per cent, in its first bi-monthly rate review
Read full policy text here:On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee
per cent from 6.25 per cent with immediate effect.
Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and
the marginal standing facility (MSF) rate and the Bank Rate to 6.25 per cent.
The MPC also decided to maintain the neutral monetary policy
stance.
These decisions are 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.
The main considerations underlying the decision are set out in the
AssessmentGlobal Economy 2
Since the last MPC meeting in February 2019, global economic activity has been losing pace
In the US, the subdued performance in the final quarter of 2018 appears to have continued into Q1:2019 as reflected in declining factory
The Euro area slowed down in Q4:2018 on soft domestic demand and contracting manufacturing activity
Of its constituents, the Italian economy contracted for two consecutive quarters in Q3 and Q4
In the UK, growth slowed down on Brexit uncertainty, with industrial production contracting during September-January
The Japanese economy rebounded in Q4 on increased domestic consumption expenditure and recovering investment spending
However, the latest data on manufacturing activity and business confidence suggest that growth lost momentum in Q1:2019
The monetary policy stances of the US Fed and central banks in other major advanced economies (AEs) have turned dovish.
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Economic activity also slowed down in some major emerging market economies (EMEs)
The Chinese economy decelerated in Q4:2018 on subdued domestic and global demand impacting industrial activity
(PMI) moved into expansion zone in March after three months of contraction
In Q1, the Russian economy continued to be impacted by both domestic and external headwinds
The Brazilian economy ended 2018 on a weak note; going into 2019, available economic indicators for Q1 suggest that economic activity
remained restrained by both weak domestic and external demand
The South African economy slowed down in the final quarter of 2018
Subdued industrial activity and worsening external demand point to a further loss in momentum in Q1.
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Crude oil prices have risen on production cuts by OPEC and Russia as well as disruption in supplies due to US sanctions on exports from
Gold prices weakened on expectations of positive outcomes of the China-US trade deal
Inflation continued to remain low in major AEs and many key EMEs due to slowing global growth and stable or falling commodity prices
Financial markets continued to be driven by monetary policy stances of key central banks and movements in crude oil prices
In the US, the equity market witnessed some selling pressure in the last week of March on weak economic data
Equity markets in EMEs gained, benefitting from country-specific factors and easing of global financing conditions
Bond yields in the US softened, slipped into negative territory in Germany and dipped further into negative territory in Japan as central
banks signalled softer stances
Bond yields in most EMEs have been falling in tandem with those in AEs and on the improving inflation outlook
In currency markets, the US dollar has traded with an appreciating bias in recent weeks
EME currencies have traded with a depreciating bias on country-specific factors and on fears of a weakening economic outlook in
China.
Domestic Economy 6
Turning to the domestic economy, the second advance estimates for 2018-19 released by the Central Statistics Office (CSO) in February 2019
Domestic economic activity decelerated for the third consecutive quarter in Q3:2018-19 due to a slowdown in consumption, both public and
However, gross fixed capital formation (GFCF) growth remained in double digits for the fifth consecutive quarter in Q3, with the GFCF to GDP
sector and affordable housing
The drag on aggregate demand from net exports also moderated in Q3 due to a marginal acceleration in exports and a sharp deceleration in
imports led by a decline in crude oil prices.
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On the supply side, the second advance estimates of the CSO placed the growth of real gross value added (GVA) lower at 6.8 per cent in
2018-19 as compared with 6.9 per cent in 2017-18
GVA growth slowed down to 6.3 per cent in Q3 due to a deceleration in agriculture output from the record level achieved in the previous year
Industrial GVA growth remained unchanged in Q3, with manufacturing GVA growth slowing somewhat
Services GVA growth also remained unchanged in Q3; while growth in construction activity accelerated, there was some loss of momentum in
public administration, defence and other services.
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Beyond Q3, the second advance estimates of foodgrains production for 2018-19 at 281.4 million tonnes were 1.2 per cent lower than the fourth
advance estimates of 2017-18, but 1.4 per cent higher than the second advance estimates of 2017-18
which may affect the prospects of a normal south west monsoon.
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Of the high frequency indicators of industry, the manufacturing component of the index of industrial production (IIP) growth slowed down to
1.3 per cent in January 2019 due to automobiles, pharmaceuticals, and machinery and equipment
The growth of eight core industries remained
sluggish in February
Credit flows to micro and small as well as medium industries remained tepid, though they improved for large industries
utilisation survey (OBICUS), improved to 75.9 per cent in Q3 from 74.8 per cent in Q2 exceeding its long-term average; the seasonally
adjusted CU rose to 76.1 per cent from 75.4 per cent
The business assessment index of the industrial outlook survey (IOS) points to an improvement in overall sentiments in Q4
The key indicators of investment activity contracted, viz., production of capital goods in January and imports of capital goods in
High frequency indicators of the services sector suggest significant moderation in activity
Sales of commercial vehicles contracted during February
Other indicators of the transportation sector, viz., port freight traffic and international air freight traffic, also contracted
However, indicators of the construction sector, viz., consumption of steel and production of cement, continued to show healthy growth
The hotels sub-segment showed some improvement in foreign tourist arrivals in January and international air passenger traffic in February
The services PMI continued to be in expansion zone for the tenth consecutive month in March 2019.
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Retail inflation, measured by y-o-y change in the CPI, rose to 2.6 per cent in February after four months of continuous decline
The uptick in inflation was driven by an increase in prices of items excluding food and fuel and weaker momentum of deflation in the food
However, inflation in the fuel group collapsed to its lowest print in the new all India CPI series
Egg prices moved into inflation after remaining in deflation in previous three months, while inflation ticked up in all other food
Inflation in the fuel and light sub-group collapsed from 4.5 per cent in December to 1.2 per cent in February
Prices of liquefied petroleum gas (LPG) declined sharply, pulled down by the lagged impact of the softening of international energy prices
The prices of firewood, with the second largest weight in the fuel group, also declined
Electricity slipped into deflation in January and February
Inflation in kerosene remained elevated, however, reflecting the impact of the calibrated increase in its administered price.
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CPI inflation excluding food and fuel declined to 5.2 per cent in January, but rose to 5.4 per cent in February, driven by a broad-based
pick-up in inflation in the personal care and effects, and recreation and amusement sub-groups
However, inflation in the clothing and footwear, and transport and communication sub-groups fell, the latter reflecting the reduction in
basis points each for the three months ahead and for the one year ahead horizons
but they expected an increase in staff expenses in Q1:2019-20
Farm and industrial input costs increased at a slow pace in JanuaryFebruary 2019
Nominal growth in rural wages and staff costs in the organised manufacturing and services sectors remained muted in Q3:2018-19.
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From a daily net average surplus of Rs 27,928 crore (Rs 279 billion) during February 1-6, 2019, systemic liquidity moved into deficit during
February 7 - March 31, reflecting the build-up of government cash balances
Currency in circulation expanded sharply in February-March
The liquidity needs of the system were met through injection of durable liquidity amounting to Rs 37,500 crore (Rs 375 billion) in February
and Rs 25,000 crore (Rs 250 billion) in March through open market purchase operations (OMOs)
Anticipating the seasonal tightening of liquidity at end-March, the Reserve Bank conducted
four longer term (tenor ranging between 14-day
and 56-day) variable rate repo auctions during the
month in addition to the regular 14-day variable rate term repo auctions
Furthermore, the Reserve
Bank conducted long-term foreign exchange buy/sell swaps of US$ 5 billion for a tenor of 3 years on
March 26, 2019,
thereby injecting durable liquidity of Rs 34,561 crore (Rs 346 billion) into the system.
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Export growth remained weak in January and February 2019 mainly due to exports of
petroleum products decelerating in response to a fall in
international crude oil prices
Among non-oil
exports, engineering goods, chemicals, leather and marine products recorded either sequentially
lower or negative growth
As in the case of exports, lower international crude oil prices downsized
the oil import bill
Non-oil non-gold imports declined sharply, dragged down by the subdued demand
for pearls and precious stones, transport equipment, project
This, along with the increase in services exports and lower outgo of income
payments, resulted in narrowing of the current account deficit
On the financing side, net
FDI inflows were strong in April-January 2018-19
Foreign portfolio investors turned net buyers in
the domestic capital market in Q4:2018-19
In the sixth bi-monthly monetary policy resolution of February 2019, CPI inflation was projected at 2.8 per cent for Q4:2018-19, 3.2-3.4 per
cent for H1:2019-20 and 3.9 per cent for Q3:2019-20, with risks broadly balanced around the central trajectory
Actual inflation outcomes averaged 2.3 per cent in January-February.
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The inflation path during 2019-20 is likely to be shaped by several factors
First, low food inflation during January-February will have a bearing on the near-term inflation outlook
Second, the fall in the fuel group inflation witnessed at the time of the February policy has become accentuated
Third, CPI inflation excluding food and fuel in February was lower than expected, which has imparted some downward bias to headline
Fourth, international crude oil prices have increased by around 10 per cent since the last policy
Taking into consideration these factors and assuming a normal monsoon in 2019, the path of CPI inflation is revised downwards to 2.4 per
cent in Q4:2018-19, 2.9-3.0 per cent in H1:2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced.
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with risks evenly balanced
Since then, there are some signs of domestic investment activity weakening as reflected in a slowdown in production and imports of capital
On the positive side, however, higher financial flows to the commercial sector augur well for economic activity
Private consumption, which has remained resilient, is also expected to get a fillip from public spending in rural areas and an increase in
disposable incomes of households due to tax benefits
Business expectations continue to be optimistic
Beyond the near term, several uncertainties cloud the inflation outlook
First, with the domestic and global demand-supply balance of key food items expected to remain favourable, the short-term outlook for food
There is also the risk of an abrupt reversal in vegetable prices, especially during the summer months
Second, inflation in fuel group items, particularly electricity, firewood and chips saw unprecedented softening in H2:2018-19
There is, however, uncertainty about the sustainability of this softening in inflation in fuel items
Third, the outlook for oil prices continues to be hazy, both on the upside and the downside
On the one hand, continuing OPEC production cuts will reduce supplies
On the other hand, there is considerable uncertainty about demand conditions
Should there be a swift resolution of trade tensions, a pick-up in global demand is likely to push up oil prices
However, should trade tensions linger and demand conditions worsen, crude prices may fall from current levels, despite production cuts by
Fourth, inflation excluding food and fuel has remained elevated over the past twelve months with some pick up in prices in February
However, should the recent slowdown in domestic economic activity accentuate, it may have a bearing on the outlook for inflation in this
Fifth, financial markets remain volatile reflecting in part global growth and trade uncertainty, which may have an influence on the
Sixth, the fiscal situation at the general government level requires careful monitoring.
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The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front
The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.
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Against this backdrop, the MPC decided to reduce the policy repo rate by 25 basis points and maintain the neutral stance of monetary
Michael Debabrata Patra and Shri Shaktikanta Das voted in favour of the decision to reduce the policy repo rate by 25 basis points
Acharya voted to keep the policy rate unchanged
Michael Debabrata Patra, Dr
Acharya and Shri Shaktikanta Das voted in favour of the decision to maintain the neutral stance of monetary policy
Dholakia voted to change the stance from neutral to accommodative.
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The next meeting of the MPC is scheduled during June 3, 4 and 6, 2019
