RBI repo rate hike will hit economy where it hurts

Economists see the GDP growth forecast of 7.4% by the Reserve Bank of India (RBI) for the current fiscal as optimistic. Most of them believe growth recovery this year could be “shallow” due to continuing risks of higher commodity prices, elevated interest rates and wider fiscal deficit. They said the consecutive hike in repo rate in the last two monetary policy reviews will slacken the “still-nascent” revival in economic growth.

D K Srivastava, chief policy adviser, EY India, whose economic growth projection for this fiscal

is 7.2%, said the three major growth constraints that could possibly slow down recovery are crude prices, fiscal slippage and high interest rate.

“It (RBI’s growth forecast) seems to be optimistic. My forecast would be 7.2%. The main constraints to growth would continue to be oil prices, the government’s fiscal situation and high interest rates,” the EY economist said.  “These would be the main constraints, but supposing the tax revenues take off and government is able spend much more, then there would be a demand stimulus. Of course, higher interest rates could add a little pressure on growth and on overall demand too,” Srivastava said.

Aditi Nayar, principal economist at credit rating agency Icra, also has a lower than RBI’s GDP growth outlook. Icra has guided a 7.1% growth for fiscal 2019.

She expects Indian economy’s growth recovery to be “shallow” on account higher interest rates and commodity prices; “Our growth forecast is a little over at 7.1% as of now. We feel that the recovery will be shallow this year as there are risks, both by higher interest rates and higher commodity prices,” she said.

She believes higher inflation and commodity prices could impact the investment demand, which could cap economic recovery. 

Abhishek Gupta, economist at Bloomberg, said the central bank’s move will deal a blow to a “still-nascent” growth recovery. 

“The hike will probably deal a blow to a still-nascent recovery in growth. We had expected a hold, based on our view inflation has already peaked and that the economy needs support in the face of high borrowing costs and oil prices, and a weak banking sector,” he said in a statement published by the financial research firm issued immediately after the policy was announced.

According to him, the central bank has neglected the rising risks to growth while taking the call to raise the policy rate. 

“The decision to tighten was driven by a recent pick-up in headline and core inflation, but — in our view — neglects the increasing risks to growth. The RBI appears to have focused on backward-looking price signals rather than forward-looking indications on growth that will set the inflation trajectory — an inconsistent stance. Our estimates show inflation in July likely slowed to 4.5% from 5% in June, marking the start of a sustained downward trend. Looking ahead, the prospect of inflation and growth both undershooting the RBI’s projections likely means rates will be on a long pause,” he said.

Bloomberg predicts a GDP growth of 7.2% in the fiscal 2019; “in our view, the output gap remains wide, with structural reforms over the past few years having raised the economy’s growth potential to around 8-8.5%”.

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While addressing the media, the RBI governor said the decision to raise the repo rate was taken to “maximum chances” of not drifting away from the inflation target of 4% and to move towards it “on a durable basis”.

“Trade skirmishes developed in the tariff wars and now we are possibly at the beginning of currency wars. Given this, we have to ensure that we run a tight lease on the risks that we can control to maximise the chances of ensuring the macro-economic stability, and continuing with the growth profile of 7-7.5% going forward. We do have things that are in our favour which you are aware of and if we continue along that path we ensure that we don’t add to the global risk profile that would adversely affect us,” he said.

Source: DNA Money