Moneycontrol
Surgeons in ancient India could conduct cataract, plastic surgeries: Vice-President Naidu

or go to

Budget 2018
Feb 07, 2018 04:27 PM IST | Source: Moneycontrol.com

RBI retains repo at 6%, projects 7.2% growth in FY19; flags inflation as a big short-term worry

The central bank has cut GVA guidance for FY18 to 6.6 percent from 6.7 percent earlier and for FY19 the guidance has been cut to 7.2 percent from 7.4 percent

Beena Parmar @BeenaParmar

Beena Parmar

Moneycontrol News

The Reserve Bank of India (RBI) on Wednesday kept its key lending rate—the repo rate—unchanged at 6 percent, but warned that costlier oil and food could knock up prices, pushing retail inflation to 5.1-5.6 percent in April to October.

The central bank, however, was bullish about the prospects in the real sector with the broader economy set to grow at 7.2 percent in 2018-19, shrugging off goods and services tax’s (GST) disorderly effects and aided by a strong rebound in exports and domestic demand.

The RBI cut its growth forecasts for the current year (2017-18), marginally to 6.6 percent from 6.7 percent, in light of fresh production and corporate income data.

The six-member monetary policy committee (MPC), headed by RBI governor Urjit Patel, also cautioned about risks from the government borrowing plans for the next year, which can potentially push up inflation and loan rates for consumers and companies.

Hardening crude oil prices, the hike in minimum support prices (MSP) for the summer-sown kharif crop for this year, greater house rent payouts to millions of state government employees and higher import duty on several items can fan inflation, the RBI said.

“The Union Budget 2018-19 has proposed revised guidelines for arriving at the minimum support prices (MSPs) for kharif crops, although the exact magnitude of its impact on inflation cannot be fully assessed at this stage,” the RBI said in its last monetary policy review for the 2017-18.

In the budget for 2018-19, Finance Minister Arun Jaitley has proposed to raise the MSP to at least 1.5 times that of the production cost, a move that many analysts fear can push up food costs. To ease the fiscal squeeze, Jaitley also raised the customs on many goods, a measure that has made products such as imported mobile phones costlier.

Retail inflation, the main price gauge that the RBI tracks for interest rate-related decisions, is now estimated to average 5.1 percent in January –March 2018, the central bank said.

The RBI also flagged the government’s new medium-term fiscal consolidation roadmap as another key worry. Jaitley has pledged to keep the fiscal deficit — a measure of how much a government borrows to meet its expenses – at 3.3 percent of the gross domestic product (GDP) in 2018-19, a deviation from the target set last year when he had said the fiscal deficit would be contained at 3 percent of the GDP from 2018-19 onwards.

“Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation,” the RBI said.

Also, normalisation of monetary policy by major advanced economies could further adversely impact financing conditions and undermine the confidence of external investors, the RBI said. Fears of imminent interest rate hikes in the US in the coming months as the Federal Reserve’s unwinding of the quantitative easing programme gathers pace has triggered a global equities sell-off.

There are also mitigating factors. Capacity utilisation remains subdued rural real wage growth is moderate.

“Accordingly, the MPC decided to keep the policy repo rate on hold and continue with the neutral stance. The MPC reiterates its commitment to keep headline inflation close to 4 percent on a durable basis,” the central banks said.

Inflation worries, however, are set to wane from the second half of 2018-19, mainly because of “diminishing statistical HRA impact of central government employees.”

The RBI is clearly keeping one eye on global oil prices that have nudged higher. The Economic Survey 2017-18, tabled in Parliament this week, has also cautioned against hardening crude oil prices that can have a dampening effect on GDP growth in the coming year.

In the first three quarters of 2017-18, the oil prices have risen about 16 percent greater in dollar terms compared to last year. Chief Economic Adviser Arvind Subramanian said on Monday that every USD 10 per barrel increase in oil price brings down GDP by around 0.2-0.3 percentage points and worsens the CAD (Current Account Deficit) by about USD 9-10 billion dollars.

Crude oil prices are now hovering around USD 70 a barrel from about USD 50 in the beginning of November. This could raise pump-gate diesel and petrol prices in India, which imports more than two-thirds of its crude oil requirements.

“Domestic pump prices of petrol and diesel rose sharply in January, reflecting lagged pass-through of the past increases in international crude oil prices,” the RBI said.

The status quo on repo rate—the rate at which banks borrow from the RBI—dashed hopes further lowering of borrowing costs for households and companies. The RBI last cut the repo rate by 0.25 percentage points to 6 percent in August.

The central bank said that there were early signs of revival in investment activity as reflected in improving credit offtake, large resource mobilisation from the primary capital markets, and improving capital goods production and imports.

The RBI projected that the Indian economy’s gross value added (GVA) for 2018-19 will grow at 7.2 percent—in the range of 7.3-7.4 percent in April-September and 7.1-7.2percent in October-April.

GVA, which is GDP minus taxes, is a more realistic guide to measure changes in the aggregate value of goods and services produced in an economy. The government has estimated that GVA will grow at 6.1 percent in 2017-18, lower than the central bank’s revised 6.6 percent growth forecast.

Global demand is improving, which should help strengthen domestic investment activity. “The focus of the Union Budget on the rural and infrastructure sectors is also a welcome development as it would support rural incomes and investment, and in turn provide a further push to aggregate demand and economic activity,” it said.

While high government borrowing carries the risk of “crowding out” private financing, the MPC is of the view that “the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management”.

The Economic Survey has also given a cheery forecast, projecting that India’s GDP will grow at 7.7.5 percent in 2018-19, buoyed by growing exports and domestic expansion.

India Union Budget 2018: What does Finance Minister Arun Jaitley have up his sleeve? Click here for live Budget 2018 news, views and analyses.
Sections
Follow us on
Available On