MPC meet: RBI revises GDP forecast to 5%; says economic growth has weakened further

Contrary to the expectations of a 25 basis point cut, the Reserve Bank of India's Monetary Policy Committee (MPC) sprung a surprise on Thursday by keeping the key policy rates unchanged at 5.15 per cent but reduced its GDP forecast for the financial year 2020 to 5 per cent from 6.1 per cent earlier. The MPC also accepted that economic growth has weakened further and output gap remains "negative".

"The real GDP growth for 2019-20 is revised downwards from 6.1 per cent in the October policy to 5.0 per cent - 4.9-5.5 per cent in H2 and 5.9-6.3 per cent for H1:2020-21," the central bank said.

The GDP has been on a downward spiral for the last six quarters. In the September quarter of this fiscal, the GDP growth slipped further to hit an over six-year low of 4.5 per cent, impacted by a slump in manufacturing output, which contracted by 1 per cent. The economic growth has moderated from the 5 per cent rate in the April-June quarter of this fiscal and 7 per cent in the July-September quarter of 2018.

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Since February this year, the RBI has revised its growth projections for the financial year 2020 from 7.4 per cent in February to 5 per cent now, which is sharpest such revision in the recent years.

According to the RBI, the real GDP growth was weighed down by a sharp slowdown in gross fixed capital formation, cushioned by a jump in government final consumption expenditure. "Growth in real private final consumption expenditure recovered from an 18- quarter trough," the RBI said.

The RBI accepted that the GDP growth for Q2 turned out to be "significantly lower than projected". "Various high-frequency indicators suggest that domestic and external demand conditions have remained weak," it added.

The central bank, however, said easing of the monetary policy since February 2019 and measures initiated by the Centre over the last few months would revive sentiment and spur domestic demand.

Edited by Manoj Sharma

Also read: RBI policy: MPC springs a surprise; keeps repo rate unchanged at 5.15%