The Reserve Bank of India (RBI) has lowered its growth forecast for the financial year 2017-18 by 10 basis points to 7.3 percent, despite foreseeing a boost in consumption and investment demand.
The Reserve Bank of India (RBI) has lowered its growth forecast for the financial year 2017-18 by 10 basis points to 7.3 percent, despite foreseeing a boost in consumption and investment demand. “With the CSO’s provisional estimates for 2016-17, the projection of real GVA growth for 2017-18 has accordingly been revised 10 bps downwards from the April 2017 projection to 7.3 per cent, with risks evenly balanced…” RBI said.
“The continuing remonetisation should enable a pick-up in discretionary consumer spending, especially in cash-intensive segments of the economy. Furthermore, the reductions in banks’ lending rates post-demonetisation should support both consumption and investment demand of households and stress-free corporates. Moreover, Government spending continues to be robust, cushioning the impact of a slowdown in other constituents,” RBI added. The Monetary Policy Committee also noted that incoming data suggest that the transitory effects of demonetisation have lingered on.
RBI said that the risks are evenly balanced, although the distribution of monsoon and government’s measures in effective food management will play a critical role in the evolution of risks.
“The risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers. At the current juncture, global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th central pay commission’s award are upside risks,” the central bank said.
RBI has also revised forecast of inflation levels for the financial year 2017-18 despite observing that multiple uncertainties on inflation remain, especially in the next few months. RBI in its policy statement said that it expects headline inflation to be in the range of 2.0 to 3.5 per cent in the first half of the financial year 2017-18 and between 3.5 to 4.5 per cent in the second half of the current fiscal year.
“…the April reading has imparted considerable uncertainty to the evolving inflation trajectory, especially for the near months. If the configurations evident in April are sustained, then absent policy interventions, headline inflation is projected in the range of 2.0-3.5 per cent in the first half of the year and 3.5-4.5 per cent in the second half…,” RBI policy statement said.
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Further, the central bank does not see any rise in inflation due to GST, India’s biggest tax reform till date.
“The implementation of the GST is not expected to have a material impact on overall inflation,” RBI said.
However, the central bank had some words of caution as well on global political risks, rising corporate debts and NPAs in the banking system.
“On the downside, global political risks remain elevated and could materialise. Second, rising input costs and wage pressures may prove a drag on the profitability of firms, pulling down overall GVA growth. Third, the twin balance sheet problem – over-leveraged corporate sector and stressed banking sector – may delay the revival in private investment demand,” RBI said.
“The Reserve Bank will continue to work in partnership with the government to address the stress in banks’ balance sheets. Better alignment of administered interest rates on small savings with market rates and stepped-up recapitalisation of banks to facilitate adequate flow of credit to productive sectors are important steps to follow through,” RBI added.