Clear evidence of economy losing traction: RBI Guv

Reserve Bank of India (RBI) Governor Shaktikanta Das said he saw clear evidence of economic activities losing traction, while his deputy Viral Acharya warned that a full-blown trade war may engulf India’s external sector and raise prospects of imported inflation.

The caution came in the minutes of Monetary Policy Committee meeting released, a day after Prime Minister Narendra Modi's top economic adviser rejected former CEA Arvind Subramanian's research that India's growth had slipped to below 5% in five years to 2017.

“Overall, there is clear evidence of economic activity losing traction, with the GDP growth in Q4:2018-19 slowing down to 5.8% growth momentum also slowed down. Investment activity, in particular, decelerated sharply.

“On the supply side, agriculture and allied activities contracted, while manufacturing activity weakened significantly. Service sector growth remained resilient, though construction activity decelerated markedly,” Das said in his submission in the minutes of MPC released Thursday.

While Das did not see inflation as a major risk in the immediate future, his deputy Acharya a pick up in the momentum of food inflation and latent fuel inflation, which could enter the headline numbers as and when the pass through happened.

Acharya said the upcoming Union Budget was, therefore, the key to understanding the inflation outlook, especially the response to ongoing distress in the agrarian economy, caused in part by low food prices.

But Acharya said in spite of his dilemma, he voted in favour of a repo rate cut from 6% to 5.75% in the June 6 policy.

“In spite of my dilemma, I vote albeit with some hesitation to frontload the policy rate cut from 6% to 5.75% (a 50 basis points rate cut from my April vote to keep the policy rate at 6.25%). This would provide insurance to help prevent the output gap from widening further,” he said.

Though all the six members of MPC voted in favour of a rate cut, most of them felt inflation could raise its head if monsoon played truant.