Gross value added growth could be at six per cent

In the backdrop of the current slowdown, the Reserve Bank of India (RBI) is expected to cut the policy repo rate by 35-50 basis points (bps) in the forthcoming monetary policy review, according to the bank’s ‘Ecowrap’ report.

The economic research department of the State Bank of India (SBI) expects gross domestic product (GDP) growth for Q4 (January-March) FY19 at 6.1 per cent. Gross value added (GVA) growth could be at six per cent, or slip marginally below 6 per cent at 5.9 per cent. FY19 GDP growth will be at 6.9 per cent.

“The good thing is that we expect that the current slowdown could be transitory if proper policies are adopted in interregnum. For example, the current high real interest rates are severely acting as an impediment to investment.

“We are thus penciling a larger rate cut (35-50 bps) by the RBI in the forthcoming policy,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

Interestingly, the report said the RBI, for the first time, could use the rate change in non-multiples of 25 bps as a first step towards providing second-generation signals to the market of future policy stance. However, even such larger rate-cuts will not help fully, but its transmission will, it added.

To this end, the RBI should now ensure that asset and liability sides of banks move in tandem and ensure repo rate is directly benchmarked to external benchmark/non-volatile bank liabilities/ current account, savings account (CASA) that are mostly used for transaction purposes.

Otherwise, the report said, the financial system would continue to be constrained by lack of transmission, even as the RBI continues to cut rates.

Published On : 27-05-2019

Source : The Hindu Businessline