RBI's Pause, a Worry for Government

RBI has cut its GDP forecast, revising it down to 6.7 percent this year as against 7.3 percent projected earlier in August.

RBI's latest monetary policy review has unreservedly arrived in disagreement to the milieu of incalculable hopes the government had pinned on the former in terms of accomplishing the much needed thrust to reinforce the economic growth which has now decelerated for the last five quarters.

The principal trepidation of the government qualifies to be the dreary 5.7 per cent GDP number in the first quarter of the year in progress. 

When the entire world, both advanced and developing, is registering economic expansion, India materialises as a solitary struggler.

By keeping status quo maintained and not interfering with the repurchase or repo rate - the rate at which the central bank infuses liquidity in the banking system - RBI has hurled an unambiguous message to the government (against its highly propagated credence), that the economy needs a boost when inflation is rising (retail inflation is up by 2 percentage points since the Monetary Policy Committee's last meeting). 

Else the growth will nose-dive more

Key decisions of meet

The monetary policy committee of the RBI has slashed its GDP forecast, revising it down to 6.7 per cent this year as against 7.3 per cent projected earlier in August. 

GDP growth had descended to 5.7 per cent in the first quarter and has been coming down incessantly over the past five quarters. 

On inflation, the committee felt that it has roughly moved on expected lines. It has projected that inflation will move in the 4.2 per cent to 4.6 per cent range over the next half year.

The Reserve Bank of India's (RBI) hawkish tone and its assessment to keep interest rates unchanged at policy review even left local bond traders grappling with losses.

Predicament haunts RBI

Nevertheless, the RBI is also in a predicament, somewhat. If the central bank envisages the enduring slowdown is due to government's economic policies alone, it's abhorrently mistaken. Although demonetisation and freshly pioneered goods and services tax (GST) are foremost grounds for the hold up, there are other explanations as well. 

Non-performing assets plaguing the banking system and over-leveraged corporate sector are the other key hurdles which this government has minimally inherited.  The slothful rate of private investment has been a matter of trepidation not only in this government but in the earlier  rule as well.

The Modi government has, on the contrary, compensated by pitching in with an increased public investment. It was what staunchly helped the economy sail through contentedly in better part of the year.

But not anymore.  

India's fiscal deficit touched 96.1 per cent of the Budget estimate for FY18 at the end of August as the government kept its foot on the spending pedal to prop up the economy while revenues came in at their accustomed reticent pace in the opening months of the financial year. 

The April-August fiscal deficit now is considerably higher than 76.4 per cent for the year-earlier period, data released by the Controller General of Accounts (CGA) has showed. 

So, it's time for corporates to pitch in antagonistically which, however, doesn't seem possible anytime soon considering their highly-leveraged balance sheets and the next Lok Sabha elections knocking at the door.

Nonetheless, a sanguine scenario is that festive spirit is most liable to lead to spike in consumption aided by the Pay Commission's award, although GST will prolong acting as a dampener for a little more time.

To finish, it's for the government to perk up its value of spending and circumvent fiscal disorderliness. As all wise men know, no one but the government is the preeminent judge of the economic health of the country!