RBI cuts growth forecast but doesn’t signal slowdown in economic activity | The Financial Express

RBI cuts growth forecast but doesn’t signal slowdown in economic activity

“The outlook for aggregate demand is positive, with rural demand catching up and urban demand expected to strengthen further with the typical upturn in the second half of the year,” it said.

RBI cuts growth forecast but doesn’t signal slowdown in economic activity
If anything, the central bank now expects growth in each quarter until Q1FY24 to top its August projections by 10-60 basis points, suggesting greater economic activities than its earlier assumption.

The Reserve Bank of India (RBI’s) downward revision of the FY23 real growth forecast for the country to 7% from 7.2% doesn’t suggest slowdown in economic activities in the coming quarters. In fact, it’s a mere reflection of the fact that actual growth in the first quarter of this fiscal turned out to be just 13.5%, way below its earlier projection of 16.2%. This forced a marginal downward revision in its growth forecast for the full year.

If anything, the central bank now expects growth in each quarter until Q1FY24 to top its August projections by 10-60 basis points, suggesting greater economic activities than its earlier assumption.

On Friday, it pegged growth at 6.3% for the second quarter, 4.6% for third and fourth quarters and 7.2% for the first quarter of the next fiscal. Its earlier growth projection was 6.2% for Q2FY23, 4.1% for Q3, 4% for Q4 and 6.7% for Q1FY24.

Of course, at 7%, the RBI’s latest forecast for FY23 is among the most conservative estimates. The government expects real growth to be between 7% and 7.5%; the International Monetary Fund projects it at 7.4% and the World Bank at 7.3%. However, the RBI’s FY24 real growth projection of 6.5% is higher than that of some independent agencies.

Also Read: Fiscal deficit at 32.6% of FY23 BE in Apr-Aug: August tax receipts down 8%, spending falls by 3%

While the RBI highlighted risks from geo-political risks (Ukraine war) and tightening global financial conditions, it also expected continued thrust on capex by the government, improvement in capacity utilisation in manufacturing and pick-up in non-food credit to sustain the expansion in industrial activity that stalled in July.

“The outlook for aggregate demand is positive, with rural demand catching up and urban demand expected to strengthen further with the typical upturn in the second half of the year,” it said.

Net exports, imported inflation pose risks

The monetary policy review dwelt on two relatively less-highlighted factors that may pose upside risks to the economy: net exports and imported inflation.

India Ratings chief economist DK Pant said, with trade deficit expected to hit a fresh record in the September quarter, beating the earlier peak ($66.8 billion) scaled in the previous three months, there is bound to be substantial drag-down effect of the sharply-negative net exports on the computation of GDP growth. It was witnessed in the June quarter as well. A more favourable net export scenario would have boosted the economic growth rate in the first quarter from just 13.5% (on a favourable base).

Similarly, a depreciation of the rupee against the greenback in the face of aggressive tightening by the US Federal Reserve will offset gains from recent easing of global commodity prices, especially of oil. Any sharp fall in the domestic currency from here on would add to price pressure. The RBI has retained its inflation forecast for FY23 at 6.7%.

Economists at Crisil said headwinds from tightening global financial conditions and risks to exports played its part in the downward revision of the RBI’s FY23 growth project, even as “domestic activity remains resilient”.

Economists at Nomura : “The RBI’s policy stance signals that further hikes and a further withdrawal of liquidity are likely, but we would not read too much into it. The main message is that uncertainty abounds, policy will be data dependent and not guided by a text book approach (we read this as, Taylor rule or rate hikes to defend the currency),” they wrote.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.