Strong public investment in roads, railways and inland waterways, and the boost to spending from the 7th Pay Commission‘s award, should improve industrial outlook.
The Reserve Bank of India Tuesday cut repo rate by 25 basis points but sounded caution on inflation.
Following are the key takeaways from the RBI policy document:
Global growth slowing more than anticipated through 2016 so far. Brexit, banking stress in Europe, China debt, rising protectionism and diminishing confidence in monetary policy key risks.
World trade volume contraction sharper than expected in the first half of 2016, and the outlook bleak.
Despite global markets having shrugged off the Brexit vote, an uneasy calm prevails on uncertainty about the stance of monetary policy of systemic central banks.
Outlook for agricultural activity (in India) bright. First advance estimates of kharif foodgrains production for 2016-17 at a record high.
Industrial sector hurt by a manufacturing-driven contraction in early fiscal year Q2, after a sequential deceleration in gross value added in Q1.
Steel and cement production strong, but output of core industries as a whole weighed down by a decline in the production of coal, crude oil and natural gas.
Business expectations polled in the Reserve Bank’s industrial outlook survey and by other agencies remain expansionary in Q2 and Q3.
Strong public investment in roads, railways and inland waterways, and the boost to spending from the 7th Pay Commission’s award, should improve industrial outlook.
Acceleration in the pace of activity in services sector in Q1 appears to have sustained.
Inflation excluding food and fuel has been sticky around 5 per cent, mainly in respect to education, medical and personal care services.
Households’ inflation expectations in the September 2016 round of RBI survey have risen.
Input costs in the manufacturing sector, including staff costs have risen, but corporates lack pricing power to pass on the costs to consumers.
Liquidity conditions have remained comfortable in Q3
Exports down but sharp fall in imports have helped contain trade deficit. Decline in remittances and the flattening of software earnings needs to be watched.
Foreign direct investment flows have slowed, but portfolio flows stronger as global investors seek better returns in an environment of negative yields.
Forex reserves at record high of USD 372 billion by September 30, 2016
Strong improvement in sowing, along with supply management measures, will improve the food inflation outlook.
Easy liquidity conditions because of RBI’s operations should help lenders, specially banks, pass on the benefits of lower cost of funds to borrowers.
There could be potential cost push pressures including the 7th pay commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices.
CPI inflation could average around 5 per cent by March 2017, with risks tilted to the upside albeit lower compared to the past.
Growth momentum expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award.
However, external demand likely to be slack because of sluggishness in global economy. GDP estimate for FY17 retained at 7.6 percent with risks evenly balanced