GDP forecast scaled down

The RBI Monetary Policy Committee has taken a unanimous decision to keep the policy repo rate unchanged at 5.15 percent, causing jitters in the market.

More important, the RBI has acknowledged its helplessness in reversing the slowdown in growth through the text book solution of further lowering the interest rate.

Even more worrisome is that the central bank has lowered its GDP growth forecast, which is expected to be in the range of 4.9-5.5 per cent in the second half of 2019-20. However, there is recognition of “monetary policy space for future action” Speaking to reporters after the release of the policy statement, Governor Shaktikanta Das said the RBI will monitor how inflation pans out before taking further policy action. "The timing of rate cuts is very important in order to optimize its impact," he added. The RBI cannot "mechanically" keep cutting interest rates every time, he added. From the consumer’s standpoint, what is of concern is that the RBI has scaled upwards its inflation forecast to 5.1-4.7 per cent in the second half of 2019-20. According to FPJ analyst (see Business page for full report) the underlying inflation measured in terms of Consumer Price Index (both rural and urban) swelled to 6.9 per cent in October 2019 – “a 39 month high”- due to an alarming increase in vegetable prices. For instance, onion prices, on top of an increase of 45.3 per cent in September 2019, further rose to 19.6 per cent in October. Incidentally, inflation expectation, measured in terms of household expectation as revealed by the RBI survey of

•Policy repo rate unchanged

•GDP growth forecast scaled down to 4.9-5.5 per cent in 2nd half of 2019-2

•Higher consumer inflation forecast at 5.1-4.7% in 2nd half of 2019-20

November 2019, recorded an increase by 120 basis points over the 3 months horizon and 180 basis points over a one-year horizon. From the foregoing, we may conclude that the growthinflation dynamics have witnessed some changes and revival of growth is now not critically dependent on interest reduction.

Consumers are pruning discretionary spending

In apparent pessimism, stemming from the declining GDP and job uncertainty, an RBI survey has found Indian consumers are cutting down on their discretionary spends. Not only consumers, even manufacturers remain anxious about the future. As per the RBI's consumer confidence survey, people's spending on non-essential items of consumption has shrunk compared to a year ago, even as they expect their overall spending to remain unchanged largely due to an increase in prices.

The RBI survey in November found households expecting prices to rise by 120 basis points over the 3-month ahead horizon and 180 basis points over the next one year.The misery of slowdown-hit households does not seem to end any time soon as factory output has also been in downward spiral. The capacity utilisation declined to 68.9 per cent in Q2 of 2019-20 from 73.6 per cent in Q1 in the early results of the RBI's order books, inventories and capacity utilisation survey. Lower capacity utilisation means fewer fresh investments and hence less job opportunities in the market. The RBI Governor also expects that the recent telecom tariff hike will add to the inflation rate.