Admitting slowdown, RBI lowers growth forecast to 6.9%

With the headwinds to growth rising from all around, Reserve Bank of India governor Shaktikanta Das on Wednesday (August 7) admitted that the economy is in a slowdown mode, but termed it as cyclical and not structural one, and exuded confidence that growth will pick up fast.

The admission of the rising headwinds to growth led the monetary authority to slash the lending rates by an unprecedented 35 bps to 5.40 per cent in the fourth successive rate reductions since he assumed power in December.

None of the macro-indicators have been promising since the past months’ plunging auto sales – which hit a 20-year low in July, plummeting IIP growth – which hit a 57-month low in June, falling exports and the continuing bloodbath in the markets, coupled with trade wars and increasing challenges to the global economy that all point to the gathering clouds.

The statement also comes amid many key personalities, including engineering giant Larsen & Toubro chairman AM Naik expressing concerns on the growth front. “Our understanding is that at this point, it is perhaps a cyclical slowdown, not really a deep structural one.”

Also read: RBI cuts interest rate by 35 bps, EMIs likely to come down

“Nonetheless, we have to recognise that there is room for certain structural reforms to be undertaken,” Das told reporters at the customary post-policy presser. He, however, exuded confidence that growth numbers will move up faster going ahead driven by the measures being taken by the government and the central bank, and partly due to the base effect.

Based on his interactions, Das said that the government is planning more measures to revive growth, and also pointed out finance minister Nirmala Sitharaman’s statements on sector-specific booster doses on the anvil.

Attributing the slowdown to both demand as well as investment slowdown, Das said, “Both demand and investment put together are having a dampening effect on growth.”

The RBI itself has reduced its growth estimate downwards to 6.9 per cent for FY20 from the 7 per cent it had projected in the June policy.

At present, Das said that both urban and rural demand has been hit which is evident in the slowdown in sales of two-wheelers and tractors in rural areas and passenger cars in cities. However, he said that RBI is hopeful of a revival and pointed out the estimate of the growth number hitting 7.5 percent in the last quarter of the fiscal.

Also read: SBI lowers lending rates by 15 bps from Aug 10

Moves like the RBI’s rate cuts of 1.10 per cent in 2019, and also the commitment to ensure systemic liquidity in the surplus mode will also help, he added. “I think credit flow will now revive and measures taken today will augment credit flow into the system. This should help boost growth numbers as well,” he said.

Speaking to reporters here last week, L&T chairman Naik had said that we should consider ourselves “lucky” if growth touches 6.5 percent in FY20. It can be noted that the March quarter GDP printed at a five-year low of 5.8 percent while the FY19 GDP printed in at a four-year low of 6.8 percent and everyone is on the same page that June quarter would be even lower than the preceding three months to March.

Others who have expressed concern on the growth include Bajaj Auto chairman Rahul Bajaj and mortgage major HDFC chairman Deepak Parekh. Amidst all these, the government has surprisingly set a target of doubling GDP to $5 trillion by 2025, which requires an annual growth rate of over 8 percent.