This is how RBI knows economic growth is slowing; both urban, rural demand shrinking

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Published: August 7, 2019 1:53:43 PM

India’s economic growth is slowing, and the Reserve Bank of India has data to show for it. The primary indicators show a contraction in both urban and rural demand, leading the RBI to cut its annual GDP growth forecast to 6.9% for the current financial year 2019-20, from 7% earlier.

RBI monetary policy committee, rbi credit policy, rbi repo rate, growth, inflation, consumption, demand, bi-montly mpc, central bankThe modest recovery in the profit margins of the surveyed firms led the RBI’s business assessment index for the first quarter to marginally improve. (Reuters image)

India’s economic growth is slowing, and the Reserve Bank of India has data to show for it. The primary indicators show a contraction in both urban and rural demand, leading the RBI to cut its annual GDP growth forecast to 6.9% for the current financial year 2019-20, from 7% earlier. Tractor and motorcycle sales are an indicator of rural demand, while passenger vehicle sales are one of the three major components of measuring urban demand. Sales in both sectors have contracted, leaving the indicator for both urban and rural demand in red.

Growth in the eight core industries also dropped in June, mainly due to a contraction in petroleum refinery products, crude oil, natural gas, and cement. Seen as an indicator of investment, import of capital goods slowed down in June. Even the construction activity indicators showed a slowdown, with contraction in cement production and slower growth in finished steel consumption in June.

Growth outlook

Industrial growth in India was pulled down by the slowdown in manufacturing and mining in May 2019. Looking at the use-based classification, production of capital goods and consumer durables has decelerated in the same period. However, consumer non-durables improved for the third consecutive month, RBI said in its monetary and credit policy statement today. Capacity utilisation in the manufacturing sector marginally rose to 76.1 per cent in Q4 from 75.9 per cent in the previous quarter, however, the seasonally adjusted capacity utilisation fell by 1.1 per cent in the last quarter of the previous financial year, according to RBI.

The modest recovery in the profit margins of the surveyed firms led the RBI’s business assessment index for the first quarter to marginally improve. The RBI monetary policy committee report says that the high-frequency indicators related to services sector activity for May-June present a mixed picture. The services PMI expanded to 53.8 in July from 49.6 in June on increase in new business activity, new export orders, and employment opportunities, the report added.  

Inflation Outlook

The RBI report also says that the liquidity in the system was in large surplus in June-July 2019 mainly due to the return of currency to the banking system and drawdown of excess cash reserve ratio balances by the banks.

A sharp pick up in prices of meat and fish, pulses and vegetables rose the food inflation to 2.4 per cent in June. Inflation in liquefied petroleum gas (LPG) and subsidised kerosene prices, however, remained elevated. However, the prices of fruits, sugar, and fuel fell in June. Housing inflation remained unchanged over the last three months, whereas inflation in the health sub-group remained elevated. Inflation in personal care and effects edged up in June due to a resurgence in gold prices.

Input cost stress from prices of agricultural and industrial raw materials continued to ease in May and June, the RBI credit policy report says. Manufacturing firms participating in the Reserve Bank’s industrial outlook survey expect input cost pressures to soften on account of lower raw material costs in the second quarter of 2019-20.

 

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