Nagesh Kumar, the only member of the Monetary Policy Committee (MPC) to have voted for a 25 basis point rate cut at its last meeting, has been proved right. He had pointed out that “Indian industry is clearly suffering from demand deficits in both domestic and external markets. Demand deficits may be the reason private investment has not picked up momentum despite the companies’ healthy balance sheets and all the reforms and incentives extended by the government.” The Q2 GDP growth of 5.4 percent bears out that truth. The State of the Economy report by RBI researchers, published a few days ago, estimated Q2 growth at a much stronger 6.7 percent. The MPC had pegged it even higher, at 7 percent. And while everybody agreed that growth would slow, the consensus was that it would drop to around 6.5 percent. The 5.4 percent growth number is a shocker.
Will the slowing growth lead to a rate cut at the MPC’s meeting next week? The RBI as well as the government has argued that the slowdown in Q2 was temporary, due to an extended monsoon and an inauspicious astrological period that led to large purchases being deferred. Those factors certainly had an impact, but the far lower than expected growth strengthens the suspicion that the slowdown is on account of more than merely seasonal factors. Moreover, the shocking GDP print for Q2 puts in question the finance ministry’s full year’s growth estimate of 6.5-7 percent, to say nothing of the MPC’s 7.2 percent forecast. Note also that the RBI’s clampdown on unsecured credit has led to a slowdown in bank credit growth and the latest data show that non-food bank credit growth has slowed to 11.15 percent year-on-year in mid-November, while it was 13.6 percent in mid-August. That doesn’t augur well for an economic rebound.
The sticking point, as the RBI governor has been at pains to emphasise, is that retail inflation for October, at 6.2 percent, was well above the upper limit of the RBI’s inflation target. The State of the Economy report by RBI researchers said, ‘’What is worrying is that apart from the sharp surge in the momentum of food prices, core inflation has edged up. There are early signs of second order effects or spill overs of high primary food prices.’’ The Flash PMI for November also shows core inflation moving up. The State of the Economy report had warned, “Inflation is already biting into urban consumption demand and corporates’ earnings and capex. If allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports.’’
It is in these unenviable circumstances of lower-than-expected growth and higher-than-expected inflation that the MPC will have to decide on its policy rate at its meeting next week.
Top-notch SEBI registered research analyst
Best SEBI registered Intraday tips provider
Telegram | Facebook | Instagram
Call: +91 9624421555 / +91 9624461555