NEW DELHI : There seems to be a greater realization at the central bank about the coming winter on the growth front. One indication is the unconventional rate cut of 35 basis points (bps).

On Wednesday, the central bank pared its growth projection for 2019-20 to 6.9% from its June forecast of 7%, maintaining that the risks are tilted to the downside as domestic economic activity remained weak, while the global slowdown and trade tensions intensified.

“The demand and investment slowdown, both put together, are having a dampening effect on the growth. Whether it (the slowdown) is structural, cyclical or a momentary phase, that’s an aspect which requires deeper analysis. Our understanding at this point is that it is perhaps a cyclical slowdown, not a deep structural slowdown. Nonetheless, we have to recognize that there is room for some structural reforms which needs to be undertaken," RBI governor Shaktikanta Das said in a press conference after the monetary policy committee (MPC) meeting.

While the International Monetary Fund and the Asian Development Bank have cut their growth projection for India to 7% for 2019-20, rating agency Crisil has pared it to 6.9%. On Tuesday, the Delhi-based think tank National Council of Applied Economic Research (NCAER) said economic growth could slow down to 6.2% in 2019-20 from 6.8% a year ago.

RBI sees growth in the first half (April-September) to be in the range of 5.8-6.6%, down from its June forecast of 6.4-6.7%.

However, it expects growth to recover in the second half (October-March) on the back of a lower base and demand boost through the policy rate cuts to 7.3-7.5%, a little higher than 7.2-7.5% projected in June.

“Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish. 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 MPC said in its statement.

The central bank slightly revised upward its inflation projection for the second half (October-March) to 3.5-3.7% from 3.4-3.7% estimated in June.

“RBI acknowledges economic slowdown since June and responds by further bringing down repo rate by 0.35 basis points. It also maintains an accommodative policy stance. This should provide a strong fillip to investment," NITI Aayog vice-chairman Rajiv Kumar tweeted.

A slew of high-frequency indicators have been pointing towards a sharp slowdown in demand, both in rural and urban India. Tractor and motorcycle sales—indicators of rural demand—continued to contract in June. Among indicators of urban demand, passenger vehicle sales contracted for the eighth consecutive month in June; however, domestic air passenger traffic growth turned positive in June after three consecutive months of contraction. Commercial vehicle sales slowed down even after adjusting for base effects. Construction activity indicators slackened, with contraction in cement production and slower growth in finished steel consumption in June. Import of capital goods—a key indicator of investment activity—contracted in June. Merchandise exports contracted in June 2019, weighed down by the subdued performance of gems and jewellery, petroleum products, rice, engineering goods and cotton.

Das in his statement said the global economic activity has slowed down since the MPC meeting in June in an environment rendered hostile by elevated trade tensions and geopolitical uncertainty, with the high uncertainty weighing on the growth outlook. “Reflecting subdued demand conditions, crude oil prices have fallen sharply since mid-May. On the other hand, gold prices have risen, propelled by increased safe-haven demand. Increasingly, central banks across the world are easing monetary policy, including through ‘insurance’ rate reductions, and are committing to maintaining accommodation in their policy stances," he added.

Acknowledging that the process of monetary transmission has not been smooth even after 110bps rate cut in four consecutive policy reviews, Das said RBI is ready to take more measures to facilitate the process.

“The system is flushed with liquidity. We have a sense that there will be an improvement. RBI is closely monitoring the situation regularly and in future whatever steps are required to ensure faster transmission, RBI will not hesitate to take those steps," Das said.

Sameer Narang, chief economist at Bank of Baroda said given the domestic and global growth dynamics, he believes GDP growth will be lower at 6.5% in 2019-20. “This implies a widening output gap. We continue to expect repo rate to move to 5% in the financial year which is in line with global narrative of central banks taking over the mantle to support growth," he added.

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