Reality Check For India's Central Bank As Slow Down Deepens

Effects of the cash ban are among factors leaving the economy in need of a boost as growth slows

- Anirban Nag

India’s central bank has finally accepted the inevitable, growth in the $2 trillion economy is slowing more than it expected.

It means recovery from an unprecedented cash ban imposed late last year by Prime Minister Narendra Modi will be a long, drawn out one and not the V-shaped bounce Governor Urjit Patel had hoped for.

With growth estimated to slow to a four-year low, the door’s open for more easing by the Reserve Bank of India in coming months as pressure builds on it to provide a boost to the economy that has been roiled by a chaotic roll out of the goods and services tax and the after-effects of the cash ban.

Of course, the downgrade to growth by the central bank risks hurting inflows from foreign investors, many of whom have been pulling money out of high-yielding Indian assets in recent weeks.

“The implementation of the goods and services tax so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term,” the central bank said in a statement released last month. “This may further delay the revival of investment activity.”

Earlier, the RBI kept the benchmark rate at a seven-year low of 6 per cent and painted a rather subdued picture of the economy. It cut its growth forecasts following a slew of downgrades by investment banks and private sector economists.