Friday, 29 September 2017

Will GDP Growth at 3-year low be Enough for RBI to Cut Rates?

Four weeks since official data showed the shocking deceleration in gross domestic product (GDP) in the first quarter of fiscal year 2018, demands for a rate cut haven’t been as vociferous as one would expect.

Bond yields have risen, stock indices have slipped and the rupee has depreciated. Of course, a lot of it was due to the US Federal Reserve’s indication that it would begin its unwinding in October. But most economists are not confident of a second rate reduction in a row by the Reserve Bank of India (RBI) after the rate cut in August.

The key reasons are that inflation has rebounded sharply as was forecast by the central bank in August. Oil prices globally are on the rise, the monsoon rainfall hasn’t lived up to the temporal distribution crucial for a good agricultural output and the government could overshoot its fiscal deficit target of 3.2%.

Get Free 2 Days Free stock future Hni Calls and more click here for more and call us:-9644405056>>

However, all of this was anticipated by RBI when it slashed its repo rate by 25 basis points to 6% in August. A basis point is one-hundredth of a percentage point.

For the central bank, it is an “I told you so” moment.

But an even more important development has been the surge in imports at a time when manufacturing growth is tepid in the country, as a Mint article on Thursday says.

What this means is that domestic supply chains have been disrupted and imports are driving whatever little growth manufacturers have shown. Any stimulus, monetary or fiscal, during such times would willy-nilly leak towards more imports. No policymaker would want that. With this, indeed, all conducive factors for a rate cut seem to have evaporated.

No comments:

Post a Comment