The Indian economy has suffered in the face of the global COVID-19 pandemic. The initial lockdown did little to reduce the spread of the disease, but it generates significant damage to economic growth. The lack of strong policy and robust fiscal stimulus has reduced the chances that Indian economic growth can return to levels last seen in 2019. With few resources around and plenty of demand, prices have been forced higher creating unwanted inflation during a period of slow growth. Surprisingly most of the inflation has been at the retail level as there has been little wholesale inflation. The Reserve Bank of India postponed its late September Monetary Policy Meeting and a new schedule is expected to be announced. The slow growth and higher inflation have weighed on the India Rupee in forex trading.
Slow Growth and Rising Inflation is Not a Good Recipe
The Indian declined by a record of 23.9% in the Q1 fiscal year. Growth is not expected to increase shortly. Goldman Sachs has sharply cut its 2020-21 GDP forecast to a contraction of 14.8%. Fitch Ratings has also revised its forecast to 10.5% contraction. At the same time inflation appears to be gaining traction which is not helpful to the Indian Central Bank.
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Indian retail inflation surged and remain well above the central bank’s target range. India CPI in August eased slightly to 6.69% during the month in line with expectations according to the Ministry of Statistics & Programme Implementation. The July CPI was revised slightly lower to 6.73% from 6.93% and the June figures were revised higher to 6.23% from 6.09%. The combination of higher inflation and economic contraction puts the Reserve Bank of India in a difficult situation. They need to lower rates to expand growth and at the same time, they need to be leery that inflation does not blaze out of control.
The RBI Postpones Monetary Policy Meeting
The Reserve Bank was scheduled to meet in the last week of September but postponed the meeting of the Monetary Policy Committee (MPC), the all-important interest rate-setting panel, over a possible lack of quorum as the appointment of independent members. The Reserve Bank in a press release said that the MPC meeting, has been rescheduled and new dates will be announced shortly.
The Issue is at the Consumer Level
The shutdown of the Indian economy has made transportation of retail goods across the country difficult. Demand remains solid, and intermediate goods are not experiencing a rise in prices. In August, after four straight months, India’s Wholesale price index-based (WPI) inflation rose by 0.16%. on a year over year basis, the monthly WPI was down 0.16% compared to a 1.17% increase during the same period in 2019 according to the commerce ministry. The decline in inflation at the wholesale level fell 9.68% in August, as against 9.84% in the previous month. Manufactured products, saw an uptick in prices rising 1.27% in August against 0.51% in July. Inflation in the Food Index rose by 4.07%.
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The Bottom Line
The upshot is that India needs a fiscal stimulus that will incent people to spend money to help relieve the decline in economic contraction. The RSI is dealing with rising inflation and falling growth which is a bad recipe. With inflation near 7%, the RBI is unlikely to further reduce rates and without an easier monetary policy or more money in the system, growth with continue to slip.