RBI lowers FY20 growth forecast to 6.16%; slump due to weaker demand, says Shaktikanta Das

The RBI's Monetary Policy Committee (MPC) revised the real GDP growth rate for 2019-20 downwards by 74 basis points to 6.16 per cent from its earlier projection of 6.9 per cent in August. RBI Governor Shaktikanta Das said the slowdown in GDP growth rate could be attributed to weaker demand. "Global financial markets have remained unsettled and the slump in real GDP growth in Q2 has been followed by weaker demand. Indicators of rural and urban demand continue to slow down," says Das.

Agencies like ADB and CRISIL have also pegged the GDP at 6.5 per cent and 6.5 per cent for 2019-20, respectively.  The RBI's earlier projection of 5.8 per cent for the first quarter had turned out to be wrong. In fact, the Governor himself admitted it came as a "surprise".

The MPC has predicted the GDP growth for Q2 at 5.3 per cent and in the range of 6.6-7.2 per cent for the second half of the financial year. The panel also revised the GDP growth for the first quarter of FY21 downwards to 7.2 per cent from 7.4 per cent in August.

The MPC report said several factors suggest domestic demand has been "weak". "The GDP growth for Q1 was significantly lower than projected. Various high-frequency indicators suggest that domestic demand conditions have remained weak. The business expectations index of the Reserve Bank's industrial outlook survey shows muted expansion in demand conditions in Q3," said the MPC.

The MPC said the impact of monetary policy easing since February 2019 was showing signs of a boost in demand, which would gradually help revive the economy. "Several measures announced by the government over the last two months are expected to revive sentiment and spur domestic demand, especially private consumption," says the MPC.

K. Joseph Thomas, Head Research  at Emkay Wealth Management said, "RBI has once again proved to be well ahead of the curve in unleashing monetary efficacies to combat the economic slowdown, in perfectly complementing the fiscal initiatives, with the cut of 25 bps- bringing down the repo rate to 5.15%. In conformity with this aggressive approach, RBI is likely to continue with its campaign for more rapid transmission of the benefits to credit users, through lower rates to a large extent linked to the base rate. There may be further cuts in the rate in the light of the GDP growth forecast being lowered form 6.90% to 6.10% for FY'20. We need to see more action from the government for a consumption-led recovery."

India's economy grew by merely 5 per cent in the April-June quarter, down from 5.8 per cent in the previous quarter. Registering a continuous downward spiral, the GDP growth for the first quarter of FY20 has been slowest in more than six years. The previous low in GDP growth was recorded at 4.3 per cent in the January-March quarter of 2012-13.

As per expectations, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) on Friday cut the key repo rate by 25 basis points to 5.15 per cent -- its fifth straight cut this year -- and maintained its 'accommodative' stance.

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Edited by Manoj Sharma