The fifth monetary policy committee meeting for the current financial year is underway. The outcome will be announced on December 5, 2019. The market is expecting a 25bps rate. However, there may be many points to ponder over.
The fifth monetary policy committee meeting for the current financial year is underway. The outcome will be announced on December 5, 2019. The market is expecting a 25bps rate. However, there may be many points to ponder over.
The recently announced GDP growth figure of 4.5 per cent has left a sense of foreboding amongst businesses and investors, alike. The market expects a protracted recovery that is unlikely to witness multiple bumps along the road. The earliest expectation of recovery is three to four quarters out. Industry trends are currently weak, indicating more pain in the immediate future. Auto sales numbers witnessed a spurt for seasonal growth in October. However, the numbers in November are down across the sector and are disappointing for most of the segments. Though there has been a corporate tax rate cut, in the current environment, there is not much investment activity taking place. A large portion of the growth can be attributed to government spending. The GDP growth minus government spending was an abysmal 3.1 per cent. While the government faces fiscal challenges it is trying its best to manage the fiscal deficit, inflation, and growth. Thus, it is unlikely that it will have much headroom to increase spending.
The Reserve Bank of India (RBI), in its fourth monetary policy meeting, mentioned that it would remain accommodative as long as necessary to revive growth while ensuring that inflation remains within the target. Market participants believe that inflation would come down from the current 4.62% level once the current crop of harvest hits the market. The inflation numbers are high due to higher vegetable and food inflation. A normalisation in this will help bring down inflation.
The current situation is worrisome as nominal GDP growth (6.1 per cent vs. 8.0 per cent in the previous quarter) has dipped below the government’s borrowing cost. If the countercyclical fiscal stimulus is able to push the economy to a higher growth trajectory, then the risks of a rating downgrade would be relatively lower.
The monetary and fiscal easing that is underway, along with the steps being taken to clean up the balance sheets of the key economic agents are likely to fuel overall economic recovery. However, it is important to understand that the road to recovery is often hard. India is has covered a fair share of the painful journey. Investors need to keep faith in the journey to make their outcome fruitful.