RBI's Monetary Policy Report Issues Alert on Some Additional Risks in Near Term

The Indian economy which has largely been subdued in the past few quarters and signs of a slowdown have cropped up, is likely to face several more risks in the near term, according to the Reserve Bank of India (RBI).

The RBI in its Monetary Policy Report, October 2019, has also said that a combination of domestic and global headwinds has depressed economic activity in the country.

"A combination of domestic and global headwinds has depressed economic activity, especially in terms of aggregate demand. The near-term outlook of the Indian economy is fraught with several risks," said the report.

It said that private consumption, which is the major support of an economic activity, has started to slow down due to several reasons.

"In this context, the performance of large employment generating sectors such as automobile and real estate remains less than satisfactory. Recent measures initiated such as the sharp cut in corporate tax rates stressed assets funds for the housing sector, infrastructure investment funds, implementation of a fully electronic GST refund system and funds for export guarantee would be helpful."

It also said that bank credit growth has slowed down and overall fund flows to the commercial sector have declined, due to risk aversion and a slowdown in demand. The monetary policy report, however, said that the recent recapitalisation of public sector banks augurs well for improving credit flows, which are important for reviving private investment activity.

"Meanwhile, global uncertainties have weakened investment activity at home. Further escalation of trade tensions could adversely impact export prospects, besides delaying the investment upturn," it said.

It also observed that the private corporate sector has not added new capacities off late even as existing capacity utilisation has risen close to its long-term average for several quarters.

"The recent measures should help kickstart the capex cycle so that new capacities can come on stream and lead to the strengthening of domestic demand in the short-term while boosting the medium-term growth potential of the economy," it said.

On the industrial sector, the report said that the slowdown in industrial activity which begun in the second quarter of the financial year (FY) 2018-19 deepened further in first quarter of FY 2019-20.

"A sharp deceleration in manufacturing GVA (Gross Valued Added) in Q1, 2019-20 essentially reflected weaknesses in the organised sector. In terms of the index of industrial production (IIP), however, the performance of manufacturing improved in Q1, 2019-20 from the previous quarter. In July, manufacturing output accelerated further," the report added.

This comes as a major concern for the economy, after the economy grew at its slowest pace in over six years in the June quarter following a sharp deceleration in consumer demand and tepid investment. India's gross domestic product (GDP) grew 5 per cent in the first quarter of the FY 2019-20. The RBI also cut its GDP growth estimates for FY 2019-20 to 6.1 per cent, from earlier estimate of 6.9 per cent.