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RBI Monetary Policy Committee decided to keep the key rates constant keeping in mind the the rising inflation rate which may settle within 4.0-4.5 % for the rest of fiscal 2018.This neutral stance has been consistent with the policy objective to keep CPI within 4% in a band of -/+2, and also ensuring that growth momentum is also supported. During the August meet of MPC repo rate had been cut by 25 basis points to 6 % due to fall in inflation. However there had been genuine concerns raised due to loan waivers given to farmers of 88,000 cr which were expected to raise the inflation rate permanently by .2 %
Since the last meet conducted in August 2017, Global economic activities have broadened.
Q 2 results in USA have been promising, although in near term the growth may be affected due to recent hurricanes which caused immense destruction of property. A positive opinion can also be made about the Euro zone economic activities too.Chinese; Japanese, Russian, Brazilian economies continued to be on trajectory of global growth thus enhancing global demand.
WTO assessment has also been positive for fiscal 2017 as compared to the 2016 financial year.OPEC crude production has been cut ,resulting in decline in the supplies and growth in demand, resulting in 2 year high price witnessed in the global crude price. Indian capital markets touched year high in September, before showing little decline due to conflicting situations in Korean peninsula. Equity markets have been on rise in most of the advanced economies. Same has been trend witnessed in the emerging markets. Capital inflows have been rising in the emerging market economies, but they also depend upon the stance of US Federal reserve.
Euro currency grew strong while Japanese Yen witnessed volatility. In India real gross value added (GVA) growth slowed significantly in Q1 of 2017-18.South west monsoon arrived at time but its activity slowed during the time from Mid July to August, thus registering a shortfall of 5 % by September end. This also reflected a decline of reservoir filling capacity to 65 % as compared to 75 % a year ago .Index of Industrial productivity figures grew as compared to June where they had contracted. Manufacturing has been weak although. Inflation figures did hit a 5 month high. Liquidity in the system persisted and at the same time currency in circulation also increased at moderate pace. Indian export growth picked up, better from previous declines over last 3 recorded months. Although Indian exports remained less as compared to many major economies. Gold import has declined, but the current account deficit has also increased considerably.Net FDI has been higher compared to previous fiscal. India’s foreign exchange reserves stood at 399 Bn $.Debt investment saw considerable rise, although there was equity outflow due to global uncertainties.
RBI’s Outlook and growth concern
MPC has assessed that food inflation will be around 4.2-4.6 % for the rest half of the year. Loan waiver given to farmers may put pressure on prices. State’s implementation of salaries similar to centre’s is also bound to put pressure on the inflation figures.Khariff production seems to be falling and so far GST has also seemed to have had adverse affect in manufacturing and thus may have slow investment over period of time. The projection of real GVA growth for 2017-18 has been revised down to 6.7 per cent from the August 2017 projection of 7.3 per cent, with risks evenly balanced.
The MPC insisted the need to fasten up investment activity which, in turn, would revive the demand for bank credit by industry. Recapitalisation of public sector banks adequately will ensure that credit flows to the productive sectors. Infrastructure bottlenecks need to be checked. Stalled investment projects need to be restarted, particularly in the public sector; enhancement in ease of doing business, along with further simplification of the GST is needed; and ensuring of faster rollout of the affordable housing programs is must along with rationalisation of excessively high stamp duties by states.
Next MPC meet will be in December, 2017.
Opinion and expectations
Indian economic growth had slowed to 5.7 % for the first quarter of fiscal 2018, due to effects of demonetisation and change to GST regime. Many prominent economists believed a need to cut the rate to give a boost to the economy. But a slow growth accompanied with a rise in inflation left less room for RBI to cut rates. The policy has been in stance with RBI mandate to keep inflation in check.
Home loan rates are lowest and are unlikely to go down further. Few prominent investors viewed that inflationary pressures are on upside and considered it as a cautious approach. Some had opinion that downside risk to growth has increased. Dampened activities have shown negative effect in all sectors. If such price pressures continue then government will have to boost its spending that may affect fiscal deficit targets.
HARSH VARDHAN PATHAK