Urjit Patel, governor of the Reserve Bank of India (RBI), gestures as he speaks during a news conference in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Demand Cooling in India Explains Why Central Bank Held Rates

(Bloomberg) -- For those surprised by India’s decision to hold interest rates last week, the central bank’s forward-looking surveys hold some explanation: demand in the world’s fastest-growing major economy may be cooling.

The capacity utilization rate, consumer confidence, and the outlook for demand in the manufacturing sector in the third quarter were less optimistic, the results of separate surveys released by the Reserve Bank of India show. That bodes ill for an economy already grappling with a weak rupee and elevated prices of crude oil -- the nation’s top import.

The tempering of optimism in the economy that expanded at 8 percent plus pace in the quarter to June was partly caused by tighter financial conditions, following back-to-back rate increases by the RBI until August and as the default by a systemically important financier plays out.

The International Monetary Fund retained its growth forecast for the $2.6 trillion economy at 7.3 percent in the fiscal year through March 2019. It lowered the projection for the next year to 7.4 percent, down from the 7.5 percent seen three months ago.

Demand Cooling in India Explains Why Central Bank Held Rates

The RBI’s Industrial Outlook Survey of the Manufacturing Sector for the second quarter of 2018-19 showed that while the outlook for selling prices had improved, expectations for profit margins were unchanged.

“Their sentiments on the overall financial situation deteriorated due to some loss of optimism on availability of finance from banks and other sources," the RBI survey said. However, respondents were more optimistic about availability of finance from abroad.

Meanwhile, the order books, inventories and capacity utilization survey for the April to June quarter that offer a snapshot of demand conditions showed capacity utilization in the manufacturing sector is declining. The findings are based on a survey of 994 manufacturing companies in India.

Demand Cooling in India Explains Why Central Bank Held Rates

The inflation-targeting central bank left the repurchase rate unchanged at 6.5 percent on Friday. Only 9 of 49 economists surveyed by Bloomberg had predicted the move. The central bank also lowered the inflation forecast to a range of 3.9 percent to 4.5 percent for the second half of the year ending March, from 4.8 percent previously.

“Looking ahead, we see inflation continuing to undershoot the RBI’s forecasts, as a widening output gap reduces price pressures," said Bloomberg economist Abhishek Gupta. "That should keep the RBI on hold in December, in our view.”

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