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RBI Watch: How to lose an economy in 10 quarters

 

Cogencis, Monday, Sep 16

By Siddharth Upasani

The Indian economy was seemingly chugging along. Not at full throttle, admittedly, but fast enough for phrases such as 'world's fastest growing large economy' and 'bright spot' to be bandied about at a clip rivaling the GDP growth rate itself. There were several troubling issues keeping the authorities busy, the banking sector being the primary one, but there is no denying the National Democratic Alliance government's stock was at its peak in early-to-mid 2016.

As is now well chronicled, a remarkable economic slowdown began in the last quarter of 2016. Remarkable because the GDP growth rate slumped by 140 basis points to 7.5% in Oct-Dec 2016 from the previous quarter; remarkable also because as recently as in April, Prime Minister Narendra Modi claimed "demonetisation is the reason why our formal economy has risen so fast".

The Last 10 Quarters Have Seen The Indian Economy Lose Steam. It Risks Losing Its Teeth Next.

GDP data for the last 10 quarters--starting from the quarter post demonetisation--shows growth has been 120 bps lower per quarter, on average, than the 10 quarters preceding demonetisation. Now, to say demonetisation is responsible for the "fast" rise of India's formal economy is a questionable claim. But neither is the currency-swap exercise solely responsible for the economy being in the rut it is in. After all, correlation does not imply causation.

What can be confidently said is the economy has lost its way in the past 10 quarters. The current government can point at a string of incidents that has occurred in the last couple of years--the multi-billion-dollar fraud at Punjab National Bank and a liquidity crisis in the non-banking finance company sector, among others--as instances of chickens coming home to roost. What it cannot do is pretend the steps it has announced have stimulated economic activity.

In his review of the 2003 film 'How to Lose a Guy in 10 Days', The Guardian's Peter Bradshaw had commented he would "rather have my molars filed down without anaesthetic than watch this again". The last 10 quarters have seen the Indian economy lose steam. It risks losing its teeth next.

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* MPC notes CPI seen within aim 12 months from now

* MPC says benign CPI gives policy space to close negative output gap

* RBI says CPI inflation projected at 3.1% in Jul-Sep, 3.5-3.7% in Oct-Mar

POLICY RATES

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Repo Rate: 5.40%

Reverse Repo Rate: 5.15%

Cash Reserve Ratio: 4.00%

Bank Rate: 5.65%

Marginal Standing Facility Rate: 5.65%

Statutory Liquidity Ratio: 18.75%

End

Edited by Avishek Dutta

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