RBI Lowers GDP Growth Forecast to 6.9 % for FY'20

Mumbai, Aug 7 (PTI) The Reserve Bank on Wednesday, August 7, marginally lowered the GDP growth projection for 2019-20 to 6.9% from 7% forecast in the June policy, and underlined the need for addressing growth concerns by boosting aggregate demand.

The RBI has cut the repo rate by an unusual 0.35 percentage points to 5.40% in its third monetary policy review for the current financial year.

Repo rate is the rate at which the RBI lends to banks.

RBI Governor Shaktikanta Das said the central bank has lowered the GDP growth forecast owing to demand and investment slowdown, which is causing dampening effect on the growth.

"Real GDP growth for 2019-20 is revised downwards from 7% per cent in the June policy to 6.9%- in the range of 5.8-6.6% for first half of 2019-20 and 7.3-7.5% per cent for the second half - with risks somewhat tilted to the downside," RBI said in the monetary policy statement.

Das said perhaps at this point of time there is cyclical slowdown and not a deep structural slowdown.

"Nevertheless, there is a need for structural reforms. We are still working on it," Das said.

The GDP growth for the first quarter of the next fiscal beginning April 2020 has been projected at 7.4%.

The RBI said various high frequency indicators suggest weakening of both domestic and external demand conditions.

The Business Expectations Index of the RBI's industrial outlook survey shows muted expansion in demand conditions in second quarter, although a decline in input costs augurs well for growth, RBI said.

"The impact of monetary policy easing since February 2019 is also expected to support economic activity, going forward. Moreover, base effects will turn favourable in H2:2019-20," it added.

Rate Cut Amid Possible Economic Slow Down

In an unusual move, the Reserve Bank of India (RBI) on Wednesday also reduced the benchmark lending rate by 35 basis points to 5.40% amid concerns over slowdown in economy.

The fourth consecutive rate cut is expected to lower equated monthly instalments (EMIs) for home and auto buyers, and borrowing cost for corporate. Earlier this week, banks had assured Finance Minister Nirmala Sitharaman of passing on the benefits of RBI's rate cut to borrowers.

The 35 basis points (bps) cut in repo is unusual, as the RBI has been changing the interest rate by 25 or 50 bps in the past.

When asked why the RBI opted for a 35-basis point rate cut, RBI Governor Shaktikanta Das said it is not unprecedented, and added that a 25-basis point reduction was inadequate while 50 bps was excessive, so the Monetary Policy Committee (MPC) took a balanced call.

The MPC, headed by the RBI Governor, decided to continue with the 'accommodative' stance on monetary policy, indicating further easing of monetary policy depending on high-frequency indicators, such as inflation.

"On the basis of an assessment of the current and evolving macroeconomic situation, the MPC at its meeting today (Wednesday) decided to...reduce the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points from 5.75% to 5.40% with immediate effect," the RBI said in a statement.

Noting that inflation is currently projected to remain within the target over the next 12 months, the MPC said since the previous policy in June, domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks.

It said even as past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap.

"Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate," the RBI said in the third bi-monthly monetary policy review for the current financial year.