The gross domestic product (GDP) growth for the first quarter of the financial year (FY) 2018, coming in at 5.7 per cent, was a shocker. Going by the present trends, the actual growth rate for FY 2018 would fall far short of the RBI’s projection of 7.3 per cent and is likely to be somewhere near the lower band of Chief Economic Advisor (CEA) Arvind Subramanian’s growth projection of 6.75 to 7.5 per cent. In the short-term, achieving the fiscal deficit target of 3.2 percent of GDP would be challenging. Job generation, tax revenue and public expenditure program,es depend on revival of growth. So, what should be the policy response to this growth slowdown?
Let us look at the issue from a longer time horizon. During 2003-11, India’s GDP grew by a record 8.4 percent. The Great Recession of 2008 didn’t impact India much. The Indian economy staged a ‘V’ shaped recovery after the minor dip in 2008-09. India’s growth rate for the 7-year period between 2011 and 2017 is only 6.65 percent and worse, trending down.
The present downturn in the Indian economy has come at a time when global growth is recovering. If global growth continues to improve and the domestic growth continues to falter, that would be a serious concern. Present indications are that the growth slump is a temporary blip caused predominantly by the impact of demonetisation and GST-related disruptions.
The market reaction to a cut or a hold by the RBI is likely to be muted. The recent market correction is healthy since valuations have been approaching bubble territory. More than the policy response of the RBI, the market will be influenced by economic data for September, particularly corporate sales figures, the trend in exchange rate, exports and capital flows into the market. If the positive trends of August are sustained in September too, the market is likely to respond positively, irrespective of what the RBI does.
Key indicators in focus as RBI decides its policy stance
October 4 will mark the completion of one-year since RBI governor Urjit Patel announced his first monetary policy after taking charge. The day will also mark the anniversary of the inception of six-member Monetary Policy Committee (MPC) which did away with the earlier practice of RBI governor singlehandedly taking a call on interest rates.
MPC, under the governorship of Patel, reduced the repurchase (repo) rate by 25 basis points (bps) last year in its October policy review. It came out with another 25-bps cut in August and is set to kick off the October 3-4 policy meeting on Tuesday. The RBI is unlikely to tinker with repo rate with nine of the 10 economists polled by Business Standard expecting status quo.
We take a look at various economic indicators from inflation to interest rates that may have influenced the RBI’s policy decision all through last one year:
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