Talks of sub-8% growth, weak investment climate on the eve of policy review
The Reserve Bank of India (RBI) on Monday reiterated that inflation remained “sticky”, but shifted focus to the rising “downside risks” to growth and a weakening investment climate. Economists interpreted the shift in stance as the central bank’s subtle hint that the monetary policy review on Tuesday may signal a gradual end to the long rate hike season started in March 2010. The consensus among economists is that whatever the RBI does tomorrow, it is expected to leave rates on hold for the remainder of the fiscal year. In its macroeconomic and monetary development report released ahead of the second quarter review of the monetary policy, the RBI said, “The monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics even as transmission for the actions is still unfolding.”
CENTRAL BANK’S MACRO VIEW
Growth may fall below 8 per cent in 2011-12. Industrial activity has slowed down, services growth may weaken further
High inflation is likely to persist over next couple of months
Investment demand is softening. Pipeline of investment is likely to shrink, putting growth in 2012-13 at risk
Widening current account deficit would pose risks if global trade and capital flows shrink
Rupee depreciation and fall in domestic share markets are in line with most other emerging markets |
The market still widely expects the central bank to increase the key policy rates by 25 basis points tomorrow before hitting the pause button. The repo rate, which is currently 8.25 per cent, was hiked 350 basis points in the past 20 months though the effective tightening was nearly 500 basis points. “This is the first time the RBI has explicitly stressed that monetary policy actions will be guided by growth-inflation dynamics, as opposed to an exclusive focus on fighting inflation. The RBI has emphasised that the transmission of the past actions are still to unfold. All these suggest that the rate cycle is close to peaking. We expect the central bank to hike the policy rate by 25 bps tomorrow and then signal a pause of sorts, unless inflation spikes again,” said Sajjid Chinoy, India economist, JPMorgan. In its review, the RBI said the growth in 2011-12 would be less than its earlier projection of eight per cent, on account of various global factors. The survey lowered the FY’12 GDP view to 7.6 per cent against 7.9 per cent earlier, mainly because of growth risks posed by global headwinds and a high inflationary scenario. The central bank cautioned the global growth prospects may have an adverse impact on the Indian economy. In addition, due to softening investment demand, the investment pipeline may shrink, putting 2012-13 growth at risk. “By stressing the slowing investment demand, global uncertainties and lagged effect of the monetary policy, the RBI is probably preparing the market for a change in stance. Inflation is not any more the only concern; growth-related issues are also now going to figure prominently in monetary policy formulation,” said Samiran Chakraborty, regional head of research, Standard Chartered Bank. The central bank said investment demand was softening due to a tighter monetary policy, impediments to completing big projects, weakening business confidence and a slowing global economy. It said planned investment in new projects had fallen “significantly” since the second half of the fiscal year ended in March, and remained low in the April-June quarter, when project finance data from 33 banks showed a 44 per cent drop-off in loan approvals from a year earlier. "Consequently, the pipeline of investment is likely to shrink, putting growth in 2012-13 at risk," the report said. The 2012-13 fiscal year starts in April 2012. The RBI also said high inflation is likely to persist over the next couple of months before moderating as falling global commodity prices so far have been offset by rupee depreciation. "Global commodity prices, especially those of metals, have softened significantly. However, even after some correction, the current Brent crude oil price is still over 25 per cent higher than its average for 2010-11," the RBI said, adding that moderation of inflation was expected in the latter part of the financial year. Headline inflation measured by the Wholesale Price Index, hovering around the double-digit mark for nearly 20 months now, is projected by the RBI at seven per cent by the end of March. "Going forward, there are significant downside risks to growth during 2011-12. GDP data for Q1 2011-12 and various lead indicators are indicative of further moderation in growth. The buoyant export growth observed up to August 2011 may not hold out on account of the sluggish growth in the advanced economies and further deepening of global uncertainties," the RBI said. With the increasing linkage of domestic industrial growth with the global industrial cycle, further moderation was likely ahead, given the weak global PMIs, the central bank said. Capacity constraints seemed to be easing in some manufacturing segments, especially cement, fertilizers and steel, the RBI said, adding construction activity had slowed and leading indicators suggested services growth may weaken slightly. Private consumption was starting to soften in parts but remained robust overall as evident from the corporate sales performance, the RBI said. Sales growth continued to be healthy, but profits were under pressure, it said.
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