Fourth Bi monthly monetary policy

• Reserve Bank today kept interest rate unchanged as was widely expected in view of upward trend in inflation even as it cut the growth forecast to 6.7 per cent for the current fiscal.

Highlights of monetary policy:

• Repo rate kept unchanged at 6 percent.
• Reverse repo rate unchanged at 5.75 percent.
• Cuts economic growth forecast to 6.7 percent from 7.3 percent for FY'18
• Projects inflation at 4.2-4.6 percent in the second half.
• GST implementation rendered prospects for the manufacturing sector uncertain in the short term.
• Focus on keeping headline inflation close to 4 percent on a durable basis
• RBI continues to work towards the resolution of stressed corporate exposures in bank balance sheets.
• Recent structural reforms improving business environment, transparency and increasing formalisation of the economy.
• Suggests concerted drive to restart stalled investment projects, enhance ease of doing business, including implification of the GST to boost growth.
• Suggests rationalisation of "excessively high" stamp duties charged by states, faster rollout of affordable housing programme.

Analysis:

• India’s economic growth slowed for the fourth consecutive quarter in the three months ended March, mirroring the impact of demonetisation on key sectors including construction and financial services.
• Gross domestic product (GDP) growth slowed to 6.1% in the fiscal fourth quarter from 7%.
• Real gross value added (GVA), another measure of economic activity that is arrived at by excluding net indirect taxes from GDP, slowed to a growth pace of 5.6% in the March quarter, also the fourth consecutive quarterly decline.
• The Central Statistics Office maintained its earlier full-year growth estimate for 2016-17 at 7.1% on top of revised 8% growth in the previous financial year.
• The growth numbers reflected the lingering effects in the March quarter of the government’s demonetisation of high-value banknotes with effect from 9 November, which triggered a cash crunch and disrupted business, especially in the unorganized sector. The labour-intensive construction sector contracted as a result of the cash shortage and regulatory changes, and financial services grew at an anaemic single-digit pace.
• The distinct downtrend in GDP growth over the four quarters of FY17 suggests that the slowdown in growth that had already set in had been intensified by the note ban.
• Fiscal fourth-quarter growth in the $2.3 trillion Indian economy, the third largest in Asia, trailed the 6.9% pace at which China grew in January-March, putting it at the risk of losing its status as the world’s fastest expanding major economy.
• India’s per capita income in real terms in 2016-17 also slowed to a growth pace of 5.7% to Rs82,296 ($1,276) against 6.8% growth last year.
• The construction sector shrank 3.7% in the March quarter, compared with a 3.4% growth in the preceding quarter. The announcement that a real estate regulator will be appointed to ensure higher accountability in the sector may have also contributed to the slowdown.
• Mining picked up to grow 6.4% and so did public expenditure, rising 17%. Agriculture output growth slowed but stayed robust at 5.2% and financial services grew by just 2.2%. The manufacturing sector (5.3%) as well as trade, hotels and transportation (6.5%) also slowed from their levels in the preceding quarter.
• Excluding agriculture and public expenditure, core GVA grew 3.8% in the fourth quarter, revealing the deeper impact of demonetisation and suggesting that economic activity would have been much slower without a substantial push in public expenditure.
• Credit rating agency Moody’s Investors Service projected India’s economy to accelerate to grow at 7.5% in 2017-18 and 7.7% in 2018-19 as the government has been able to limit the negative impact of last year’s demonetisation on the economy.
• The World Bank also expects the Indian economy to grow at 7.2% in FY18 and gradually gather pace to touch 7.7% by FY20, a year later than Moody’s projection.

By: Vishal