RBI Cuts FY18 Growth Forecast To 6.7%; Repo Rate Left Alone

Mint Road revised its GVA growth projection for fiscal’18 to 6.7 per cent, down from August’s 7.3 per cent. And in what would have come as a big let-down for India Inc., maintained the repo rate at six per cent.

While the central bank held back from firing its guns on rates, it cut the statutory liquidity ratio (SLR) by 50 basis points to 19.5 per cent which will release Rs 50,000 crore by way of liquidity into the banking system. The SLR is the sum banks invest mandatorily in government securities (G-Secs) for every Rs 100 held in deposits -- or Rs 19.5 going ahead, down from Rs 20 earlier.

The tweak in the SLR is an attempt by Mint Road to nudge banks to lend as it lightens the load on them to make such investments. But given the poor appetite for credit, banks may, for the time being, opt to remain invested in G-Secs over and above what is mandatory – or in excess of 19.5 per cent. Dinabandhu Mohapatra, MD & CEO of Bank of India was candid: “Banks are anyway holding excess SLR”.

“The decision of the Monetary Policy Committee (MPC) is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of four per cent within a band of +/- 2 per cent, while supporting growth”, Reserve Bank of India (RBI) said.

The MPC voted 5-1 in favour of leaving the policy repo rate unchanged. Chetan Ghate (Professor, Indian Statistical Institute (ISI); Pami Dua (Director, Delhi School of Economics), and ex-officio members -- Michael Debabrata Patra (RBI Central Board); Viral V Acharya (RBI-DG); and Governor Urjit R Patel -- were in favour of the monetary policy decision, while Ravindra H Dholakia (Professor, Indian Institute of Management-Ahmedabad) voted for a slash of at least 25 basis points. The minutes of the MPC’s meeting will be published on 18th October; the MPC will meet again on 5th December.

The Plot Ahead
Mint Road pointed out actual inflation outcomes so far have been broadly in line with projections, though the extent of the rise in inflation excluding food and fuel has been somewhat higher than expected. In August, headline inflation was projected at three per cent in Q2 and 4.0-4.5 per cent for the second half of fiscal’18.

The variables at play on the inflation front going ahead are -- a) advance estimates of kharif production indicate the southward trend in pulse prices has been arrested and begun to stabilise; b) Price revisions post-implementation of the goods and services tax (GST); c) a “broad-based” uptick in CPI inflation (excluding food and fuel); and d) the hardening of global fuel prices.

“Taking into account these factors, inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of this year, including the house rent allowance by the Centre (following the 7th Pay Commission)”, said Patel.

Mint Road noted “the loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook. The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates”. Put simply, the pain in the economy will continue for some more time.

“Taking into account the above factors, the projection of real GVA growth for 2017-18 has been revised down to 6.7 per cent from the August 2017 projection of 7.3 per cent”, RBI noted.

Reading the tea leaves, Sonal Varma, Chief India Economist at Nomura said in a note the central bank’s decision “to maintain the status quo is indicative of its inclination to look through the near-term outlook, which is clouded by transitory factors and concerns over higher core inflation”. Varma referred to a higher probability that the central government will miss its budgeted fiscal deficit target of 3.2 per cent of GDP in FY18 by 0.3 pp (percentage points). “Against this backdrop, we expect the RBI to leave policy rates unchanged in our base case”.

You have to grin and bear!