Reserve Bank of India governor Shaktikanta Das said that there is a clear indication of the economy slowing down and investments dipping sharply.
"There is clear evidence of economic activity losing traction while giving the rationale for a rate cut. Overall, there is a clear evidence of economic activity losing traction, with the GDP growth in Q4 2018-19 slowing down to 5.8%," Das said, according to the minutes of the Monetary Policy Committee meeting released on Thursday.
With inflation also showing signs of moderation, Das said in the MPC meeting that the time is right for a decisive rate cut and also a change in the monetary policy stance from neutral to accommodative. All six members of the MPC had voted unanimously for a rate cut.
Data released by the National Statistical Office (NSO) placed GDP growth at 6.8% for 2018-19, 20 basis points lower than the February 28, 2019 estimates. In Q4 of 2018-19, the GDP growth decelerated sharply to 5.8 % from 6.6 % in Q3 and 8.1% a year ago. Though the base effect played some part, growth momentum also slowed down.
"Investment activity, in particular, decelerated sharply," he added. Agriculture and allied activities contracted while manufacturing activity weakened significantly. Service sector growth remained resilient, though construction activity decelerated markedly.
CPI inflation, excluding food and fuel, registered a 20-month low in April 2019, even as the headline CPI inflation evolved broadly along the projected lines. High-frequency indicators suggest that the global economy could not sustain the improved performance in Q1 2019 in the face of a sharp slowdown in trade and manufacturing activities. Consequently, central banks in both advanced and emerging market economies have adopted an accommodative stance in monetary policy.
"Growth impulses have clearly weakened, while the headline inflation trajectory is projected to remain below 4%. My vote is to reduce the policy repo rate by 25 basis points. My vote is also to shift the stance of monetary policy from neutral to accommodative to send a clear signal," said Das.
The MPC was worried about the moderation in activity in the service sector. Sales of commercial vehicles, tractors, passenger cars, and two- and three wheelers contracted in April. Cement production and steel consumption – the two key indicators of construction activity – also slowed in April.
Das further noted that "growth impulses have clearly weakened", while the headline inflation trajectory is projected to remain below 4% throughout 2019-20 even after considering the expected transmission of the past two policy rate cuts.
Deputy governor Viral Acharya said despite being in a dilemma he would vote for a rate cut to front-load the rate action to give a momentum to growth. He added that MPC will have to remain vigilant on inflation.
Inflation hawk in the MPC, Michael Patra, said that weakening demand, higher capacity utilisation without investments for new production, weak pricing power of certain companies reveals deterioration in the outlook for the economy. External members Ravindra Dholakia, Pami Dua and Chetan Ghate also echoed worries about the growth in the economy and voted for a cut.
