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Zero growth, credit freeze, price rise, demand squeeze… RBI report shows economy in a tight spot

The silver lining, if any, comes from the agriculture sector, says RBI.

, ETMarkets.com|
Last Updated: May 22, 2020, 02.28 PM IST
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40 bps repo rate cut, negative GDP outlook, says Shaktikanta Das at RBI Gov PC
40 bps repo rate cut, negative GDP outlook, says Shaktikanta Das at RBI Gov PC
NEW DELHI: The Indian economy is staring at negative growth this year, and this is not the only alarming news coming out of the Reserve Bank of India’s off-cycle policy review, in which the central bank decided to further lower the repo rate, or short-term lending rate, to 4 per cent.

RBI’s review of the state of the economy threw light on multiple aspects, including a major demand destruction due to the Covid disruption, a gradual spike in prices of essential goods, muted credit growth even after the huge liquidity infusion and an uncertain inflation outlook despite the plunge in crude oil prices.

The silver lining, if any, comes from the agriculture sector, says RBI. And there, a ray of hope comes from the forecast of a normal monsoon.

Governor Shaktikanta Das also said the monetary policy transmission has continued to improve and RBI will remain vigilant and battle-ready to address the dynamics of an unknown future and will preserve stability of financial markets.

Here are the key takeaways from the MPC statement:

GDP to shrink… All sectors, barring agriculture, will be distressed in the first quarter of the financial year. “Even though the lockdown may be lifted by May-end with some restrictions, economic activity may remain subdued even in Q2 due to social distancing measures and the temporary labour shortage,” the MPC said. Das, in his statement, said the GDP growth for FY21 is seen to be in the negative territory.

Headroom for more action… It is necessary to ease financial conditions further, said the MPC, which in its opinion will facilitate flow of funds at affordable rates to try and revive animal spirits in the economy. “With the inflation outlook remaining benign as lockdown-related supply disruptions are mended, the policy space to address growth concerns needs to be used now rather than later to support the economy, even while maintaining the headroom to back up the revival of activity when it takes hold,” the committee said.

Global economy at standstill… The MPC said many advanced and emerging economies have seen contraction in economic activities due to the Covid related lockdown. “Among the emerging market economies, the Chinese economy went into a pronounced decline and data on high frequency indicators suggest that activity may have also shrunk in Brazil and South Africa,” it said.

Consumption plummets… The high-powered committee of the Reserve Bank of India highlighted that high frequency indicators pointed to a collapse in demand since March 2020 across both urban and rural segments. “Electricity consumption has plunged, while both investment activity and private consumption suffered precipitous declines, as reflected in the collapse in capital goods production and the large retrenchment in the output of consumer durables and nondurables in March,” the committee said, adding that the services sector also saw sizeable contraction.

Agriculture is sole beacon of hope… The agriculture sector was the only silver lining in the last few months, the committee said. Summer sowing of rice, pulses and oilseeds in the country progressing well, with total area sown under the current kharif season up by 43.5 per cent so far, and the rabi harvest promising to be a bumper as reflected in record procurement.

Disruption made essentials dearer…The six-member committee said retail inflation in April spiked as supply disruptions took a toll and reversed the softening of food inflation, which surged to 8.6 per cent from 7.8 per cent in March. Prices of vegetables, cereals, milk, pulses and edible oils and sugar emerged as pressure points, it added. Globally, CPI inflation remained subdued across major economies due to a collapse in oil prices and compression in demand amidst lockdowns, while food inflation picked up due to supply disruptions.

Rs 9.42L cr liquidity injection till now… RBI said it has injected liquidity totalling Rs 9.42 lakh crore, or 4.6 per cent of the gross domestic product. This includes multiple rounds of OMOs, TLTROs and purchasing of dated securities. The central bank has also provided Rs 22,334 crore as refinance to National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB) and Rs 2,430 crore to mutual funds in order to ease liquidity constraints.

Credit growth muted… The MPC conceded that the credit growth remains muted but added that thanks to its measures domestic financial conditions have eased appreciably. Yields have come down, banks’ investments in debt papers rose and there were net inflows into mutual fund schemes.

Inflation outlook uncertain… The MPC said the inflation outlook is highly uncertain but expects moderation in food inflation as supply line is restored and monsoon remains normal. It expects low prices in international crude oil, metals and other industrial raw materials due to demand-supply gaps. The committee said headline inflation is likely to be below target in Q3 and Q4 of 2020-21.

All members voted for rate cut… RBI said all members of the MPC voted for a reduction in the policy repo rate and maintaining the accommodative stance. Pami Dua, Ravindra H. Dholakia, Janak Raj, Michael Debabrata Patra and Shaktikanta Das voted for a reduction in the policy repo rate by 40 bps,while Chetan Ghate voted for a reduction by 25 bps. The minutes of the MPC’s meeting will be published by June 5, 2020.
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