RBI Monetary Policy: Takeaways from outgoing RBI Governor Rajan's last credit policy

Moneycontrol BureauAs widely expected, the Reserve Bank of India kept benchmark rates unchanged at today’s credit policy. Highlights from the policy document, the last one to be overseen by outgoing RBI governor Raghuram Rajan: Outlook for the global economy remains mixedWorld trade remains sluggishBarring cotton, jute and mesta, sowing of all crops currently above last year’s acreage. Target for Kharif production within reach.Prolonged sluggishness in the capital goods sector indicative of weak investment demand. Rate of contraction in consumer non-durables slowed, pointing to some revival in rural demand. Pace of growth of consumer durables stable and buoyed by urban consumption demand. Barring contraction in natural gas and crude oil, core sector resilient as of 2016-17 so far. Some signs of green shoots in manufacturing too.Business confidence looking up in recent months, but capacity utilisation, seasonally adjusted, still weak.High frequency indicators of service sector activity still emitting mixed signals, although a larger number of indicators in acceleration mode in Q1. Inflation pressures in cereals and pulses have fed through into households’ inflation expectations three months ahead, reversing the decline seen in the last two quartersRural wage growth rising albeit moderately, driven up by wages of agricultural labourers. Staff costs in the organised sector relatively restrainedLiquidity conditions eased significantly during June and July on the back of increased spending by the GovernmentImports continue to decline, albeit at a slower pace. Demand for gold muted. Non-oil non-gold imports continued to shrink, pulled down by coal, fertilisers, ores, iron and steel and machinery and transport equipment. Pace of foreign direct investment inflows slowed in the first two months of 2016-17, but net portfolio flows stronger after the Brexit vote.Momentum of growth expected to be quickened by the normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to consumption spending from the disbursement of pay, pension and arrears following the implementation of the 7th CPC’s award.Risks to the inflation target of 5 per cent for March 2017 continue to be on the upside. Much will depend on food prices, fuel prices and house rents (as a result of the seventh pay commission hikes)GDP growth target for 2016-17 retained at 7.6 percent, with risks facing the economy at this juncture evenly balanced.