With pick up in industrial activity and good monsoon, the Reserve Bank of India (RBI) in its annual report has said that it expects India’s gross domestic product (GDP) growth rate to accelerate to 7.4% in the current financial year (FY19) from 6.7% in the previous year, with risks evenly balanced. RBI also said that its monetary policy will continue to be guided by the objective of achieving the medium-term target for retail inflation of 4%, within a tolerance band of +/- 2%, while supporting growth. However, it cautioned that the country’s external sector will have to confront global headwinds, but expressed confidence that the Current Account Deficit would largely be financed by foreign direct investment.
The annual report noted that agricultural production is likely to remain strong, growth impulses in industry are strengthening (propelled by a sustained pick-up in manufacturing and mining activity), corporate are reporting robust sales growth and improvement in profitability, and services sector activity is also set to gather pace. Also, revenue-earning freight traffic of railways has picked up, driven by stepped-up movement in coal, fertiliser and cement. It said over the rest of 2018-19, the acceleration of growth that commenced in 2017-18:H2 is expected to be consolidated and built upon.
The central bank further said the up-tick in credit growth is likely to be supported by the progress being made under the aegis of the Insolvency and Bankruptcy Code (IBC) in addressing stress on balance sheets of both corporates and banks, recapitalisation of state-owned banks, and a positive outlook on the economy. The prevailing negative credit-to-GDP gap indicates that there is sufficient scope for credit absorption and expansion in bank lending on a sustained basis.
On the inflation front, RBI said it is likely to face upside risks over the rest of the year from a number of sources, warranting continuous vigil and a readiness to head off those pressures from getting generalised. Rising global commodity prices, especially of crude oil, and recent global financial market developments are firming up input cost pressures. The RBI has cautioned that global headwinds are likely to confront India’s external sector in 2018-19. Even though exports have gathered momentum in Q1FY19, the worsening global trade environment as a result of protectionist policies may impinge upon external demand. Elevated crude oil prices and the strengthening of domestic demand may push up the import bill.
