RBI policy highlights: Rural weak, recovery in some exports

Moneycontrol BureauThe Reserve Bank of India on Tuesday kept benchmark interest rates unchanged, even as Governor Raghram Rajan said there were enough signs that the economy was on the path to recovery.Following are the key takeaways from the RBI Credit Policy:*Unease in global investor sentiment is likely to increase ahead of the imminent divergence in advanced economy monetary policy stances*Macro indicators suggest the economy is in the early stages of a recovery, though with some areas of continued weakness.*Value added in agriculture and allied activities picked up on the modest increase in kharif output and timely policy interventions to stem the effects of the deficient south-west monsoon*Overall, the current outlook for agricultural growth in 2015-16 appears moderate at best at this juncture.*Industrial indicators mixed. Urban consumption showing signs of a pick-up in some areas such as passenger vehicles sales, but rural demand has been weakened by two consecutive deficient monsoons and slowing construction activity. New project announcements as measured by the Centre for Monitoring Indian Economy grew more strongly in the second quarter. *Services indicators mixed. Commercial vehicle sales (reflecting transportation demand) and domestic civil aviation passenger traffic accelerated year-on-year. However, tourist arrivals, cargo handled at major ports, railway freight traffic, domestic and international air cargo traffic, and measures of construction such as steel consumption slowed.*Households’ inflation expectations remain elevated although they have edged lower recently, perhaps in response to lower prices of petrol and diesel. Rural wage growth, as also corporate staff costs, remain subdued.*Declining exports indicative of persisting weakness in global trade. Excluding petroleum products, decline in exports more moderate and early signs of a turnaround visible in readymade garments, drugs and pharmaceuticals and electronics.*While oil prices, barring geopolitical shocks, are expected to remain benign for a few quarters more, uptick of CPI inflation excluding food and fuel for two months in succession warrants vigilance.*Inflation expected to rise further until December before plateauing. But it is expected to broadly follow the path set out in the September review (5.8 percent for January 2016) with risks slightly to the downside.*GDP growth projection for 2015-16 kept unchanged at 7.4 per cent with a mild downside bias.*Implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bank’s future deliberations, though its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening* RBI to shortly finalise methodology for determining base rate based on marginal cost of funds, government examining proposal to link small savings interest rates to market interest rates. This should help lower interest rates.