By Swati Bhat
MUMBAI (Reuters) – A sharp slowdown in India’s manufacturing sector – a key driver of job creation – was a major factor in the monetary policy committee’s (MPC) decision to cut the key repo rate earlier this month, an external member told Reuters.
“In particular, there was a concern about the weaknesses of the manufacturing sector, which is important for job creation, due to subdued urban consumption and slow growth of private investments,” Nagesh Kumar said on Friday, adding the views were his own and not those of the committee.
“The challenging global economic environment with threat of major trade wars erupting also does not bode well for the manufacturing sector,” he said.
India forecast annual growth of 6.4% in the year ending in March, the slowest in four years and below the lower-end of the government’s initial projection, due to a weakness in manufacturing and slower corporate investments.
The manufacturing sector grew 2.2% in the September quarter, much slower than the 7% growth seen in the June quarter.
In February, the MPC, which includes three central bank members and three external members, delivered a 25-basis-point rate cut in the first such move in nearly five years.
A moderation in domestic inflation provided some elbow room to support economic growth by cutting the repo rate, Kumar said, but added that this is one of several factors that support growth.
Growth is also determined by fiscal, monetary policy and external factors, including public investment, tax rates determining disposable incomes, and external measures that support export demand for Indian goods, he said.
While calling for a wait-and-watch approach to study the evolving growth-inflation dynamics ahead of the next monetary policy meeting in April, Kumar said he was fairly optimistic about the inflation outlook.
“(Global) crude oil prices are likely to head downwards due to the Chinese slowdown, the recently announced ceasefire in the Middle East with the prospects of the Ukraine conflict also brightening with the (Donald) Trump 2.0 presidency, which could enhance U.S. output of oil and growing dependence on renewables.”
(Reporting by Swati Bhat; Editing by Sonia Cheema)
