New Delhi: Crisil on Monday cut India’s growth forecast for current fiscal to 7.4 per cent on the back of weakening global GDP and trade growth.
India’s growth in the July-September quarter slipped to 7.1 per cent from 8.2 per cent in the April-June quarter.
“For fiscal 2019, we are lowering our GDP growth forecast by 10 basis points to 7.4 per cent from 7.5 per cent estimated earlier. Forecasts of lower global trade and GDP growth has created a downward bias to growth in emerging economies,” Crisil said. India’s export, which saw a revival in early part of 2018, could likely see a slower growth, it projected.
“The forecast has a downward bias given that global growth prospects are turning weaker than estimated earlier. Also, if liquidity issues persist in the financial system, demand could get further dented,” Crisil said.
Despite the downward revision at 7.4 per cent, India’s growth in fiscal 2019 will be faster than both, the 6.7 per cent seen in fiscal 2018 and the trend rate of growth, Crisil said. It said the long-term average growth rate seen in the last 13 years, as per the recently released GDP back series data is 6.9 per cent.
Key interest rate unchanged
The RBI is expected to keep its key interest rate (REPO rate) unchanged at its penultimate monetary policy review of the fiscal on Wednesday at a time when inflation – the central bank`s key concern – has softened, as has GDP growth, according to the figures for the second quarter ending in September.
At its previous bi-monthly review in October, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) held its repo, or short term lending rate, unchanged at 6.5 per cent in a context of rising crude oil prices posing an inflationary risk as well as a weakening rupee.
Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds.
“RBI may get the much-needed elbow room to keep the policy rate unchanged in the forthcoming bi-monthly policy review on 5 December,” said US rating agency Fitch Group subsidiary India Ratings and Research Chief Economist Devendra Kumar Pant.
“Based on the September quarter GDP growth and the likelihood of lower growth in the second half of the year, chances of fiscal slippage are very high. The central bank is expected to stay on hold,” he added.
What this means
The RBI`s policy review is coming at a time of slowdown in growth and private investment, and soon after the ongoing liquidity crunch has provoked a tiff between the government and the central bank.
The government`s differences with the RBI centres on four issues – the former wants liquidity support to head off any credit freeze risk, a relaxation in capital requirements for lenders, relaxing the prompt corrective action (PCA) rules for banks struggling with accumulated non-performing assets (NPAs), or bad loans, and support for micro, small and medium enterprises.
The current liquidity crunch, particularly among non-banking finance companies, follows a series of defaults last month by the privately-run Infrastructure Leasing and Financial Services and banks hesitating to lend after a series of scams, most notably the Rs 14,000 crore fraud on state-run Punjab National Bank reported in February.
Neutral stance
Elaborating on the change of stance to ‘calibrated tightening’, RBI Governor Urjit Patel said that it implied that ‘in this cycle, a rate cut is out of the table and we are not bound to increase rates every time we meet. With this stance we have two options, we can either increase rates or hold them,’ he said.
A ‘neutral’ stance allows the RBI to move either way on rates. On the decision to hold the repo rate, Patel said that “actual inflation outcomes, especially in August, were below projections as the expected seasonal increase in food prices did not materialise and inflation excluding food and fuel moderated.”
The RBI has lowered its inflation projection for the July-September quarter to 4 per cent, and between 3.9-4.5 per cent for the second half of the fiscal ‘with risks somewhat to the upside.’