RBI Policy: 20 must-know points from the committee statement

The RBI’s Monetary Policy Committee on October 4 cut the benchmark repo rate by 25 basis points to 5.15 percent and slashed GDP growth forecast for this fiscal to 6.1 percent from 6.9 percent. It said that it would continue with an “accommodative stance as long as it is necessary” to revive growth while ensuring that inflation is kept in check.

Following are the key takeaways from the Monetary Policy document:

- Global economic activity has weakened further since August. Heightened uncertainty emanating from trade and geo-political tensions is worrying.

- Major emerging market economies (EMEs), notably China, are hurting from a deteriorating global environment during July-September

- Crude oil prices are volatile. Gold prices are high on safe haven demand, and central banks are globally more accommodative because of low inflation.

- Global financial markets are volatile because of trade tensions between the US and China

- The prospects of agriculture are brighter due to abundant rainfall in August and September. This could help regenerate employment and income and lift domestic demand.

- The growth in the services sector stalled by construction activity

- RBI’s September round of inflation expectations survey indicates that households expect inflation to rise by 40 basis points over a three-month ahead horizon and 20 basis points over a one-year ahead horizon, possibly responding adaptively to the rise in food prices in recent months.

- The Reserve Bank’s consumer confidence survey shows weak consumer sentiment and tepid consumption demand, especially relating to non-essential items.

- Manufacturing firms see weakening of demand conditions in Q2:2019-20 and Q3 and expect their output prices to soften, going forward, as the cost of finance and salary outgoes remain muted.

- The overall liquidity remained surplus in August and September despite the expansion of currency in circulation and forex operations by the RBI draining liquidity from the system.

- The monetary transmission is staggered and incomplete. The cumulative policy repo rate reduction was 110 bps during February-August, but the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by just 29 bps.

- Kharif production is estimated at close to the 2018 level, auguring well for the overall food supply situation

- Vegetable prices may remain elevated in the immediate months but are likely to moderate as winter supplies enter the market.

- Prices of pulses are expected to remain contained by adequate buffer stocks. Price pressures in consumer inflation excluding food and fuel are likely to be muted.

- Crude oil prices may remain volatile in the near-term while global demand is slowing down, the persisting geo-political uncertainties pose some upside risks to the inflation outlook.

- Consumer inflation projection revised slightly upwards to 3.4 per cent for second quarter of 2019-20 while projections are retained at 3.5-3.7 per cent for second half of 2019-20 and 3.6 per cent for first quarter of 2020-21, with risks evenly balanced.

- The real GDP growth for 2019-20 is slashed from 6.9 per cent in the August policy to 6.1 per cent

- The GDP growth for the second half of 2019 is expected to be in range of 6.6-7.2 per cent, against the earlier estimate of 7.3-7.5 percent

- Various high frequency indicators suggest weak domestic demand conditions. The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q3

- The negative output gap has widened further. While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum.