Status quo on key rates likely
As per official data announced by Central Statistics Office CSO recently, economic growth hit a slow lane in second quarter of the current financial, clocking 71 per cent upswing The GDP growth during JulyAugust period was significantly lower than 82 per cent clocked in the first quarter of AprilJune 2018 and was at ninemonth low
As per official data announced by Central Statistics Office (CSO) recently, economic growth hit a slow lane in second quarter of the current financial, clocking 7.1 per cent upswing. The GDP growth during July-August period was significantly lower than 8.2 per cent clocked in the first quarter of April-June 2018 and was at nine-month low. This slowdown was primarily because of deceleration in key service sector which started in final quarter of last financial year. Private consumption, which constitutes 55 per cent of GDP, also slowed down while public expenditure came to the rescue of the economy. This slowdown in growth prompted many analysts to forecast that the GDP growth would slip below seven per cent a lot earlier than fourth quarter of the current as predicted in the past.
In this backdrop, the fifth bi-monthly policy review meeting of 2018-19, which is currently underway, assumes significance. Six-member monetary policy committee (MPC) headed by RBI Governor Urjit Patel started the review meeting on December 3 and the policy announcement would be made today.
The committee is expected to cut key rates if it’s keen on boosting economic growth ahead of General Elections scheduled for May, in which the current dispensation at the Centre has high stakes. It is very unlikely that RBI and the committee will go for a rate cut at a time when inflation reading is still in uncomfortable zone. At present, the key repo rate is pegged at 6.5 per cent. There is also a chance that the apex bank may change its policy stance to calibrated tightening from neutral.
In the recent meeting, RBI Board had taken a decision to restructure loans of micro, small and medium enterprises (MSMEs). The Board also decided to set up an expert committee to decide on whether a part of its reserves could be transferred to the central government’s coffers for boosting economic growth. Arvind Subramanian, former chief economic advisor (CEO), made it clear that the Centre could take Rs 4.5-7 lakh crore from excess capital or reserves that RBI currently has. RBI is keeping close to 28 per cent of its balance sheet in the reserves, against an 8.4 per cent global average, Subramanian wrote in his recent book 'Of Counsel: The Challenges of the Modi-Jaitley Economy'. He was the CEA from October 2014 to June 2018. The MPC is likely to give some clarity on these issues in the policy review.
The apex bank is also expected to give some positive signal on liquidity front. There is a liquidity crunch in the market, with some analysts estimating that money market deficit will widen to Rs 1.44 lakh crore in December. Recently, the apex tried to ease liquidity crunch by pumping Rs 40,000 crore through open market operations. It may have to infuse Rs 50,000 crore a month over next couple of months to increase liquidity in the market. But the apex bank’s decision on key rates will be crucial, though chances for maintaining status quo are high. So, there will be no immediate boost to enhance economic growth!