The Reserve Bank of India Tuesday sounded a dovish note on its outlook for inflation, but the policy statement highlights some of the hurdles in the path of economic growth. Inflation may be easing, but growth is still not a given, is the impression one gets from a close reading of the document. Also, it could still take another quarter before RBI can a claim a decisive victory over inflation and lower interest rates.
Excerpts from the policy statement:
* The rabi crop is unlikely to compensate for the decline in kharif production earlier in the year and consequently, agricultural growth in 2014-15 is likely to be muted. This, along with a slowdown in rural wage growth, is weighing on rural consumption demand.
* The persisting contraction in the production of both capital goods and consumer goods in Q2 reflected weak aggregate domestic demand. Exports have buffered the slowdown in industrial activity in Q2 but, going forward, require support from partner country growth
* Administered price corrections, as and when they are effected, weaker-than-anticipated agricultural production, and a possible rise in energy prices on the back of geo-political risks could alter the currently benign inflation outlook significantly.
* Various constituents of the services sector are emitting mixed signals.
* A durable revival of investment demand continues to be held back by infrastructural constraints and lack of assured supply of key inputs, in particular coal, power, land and minerals. The success of ongoing government actions in these areas will be key to reviving growth.
* Fiscal outlook should brighten because of the fall in crude prices, but weak tax revenue growth and the slow pace of disinvestment suggest some uncertainty about the likely achievement of fiscal targets, and the quality of eventual fiscal adjustment
* The full outcome of the north-east monsoon will determine the intensity of price pressures relating to cereals, oilseeds and pulses, but it is reasonable to expect some firming up of these prices in view of the monsoon's performance so far and the shortfall estimated for kharif production
* Protein-rich items such as milk and pulses continue to experience upside pressures, reflecting structural mismatches in supply and demand
* Weighted average call rates as well as long term yields for government and high-quality corporate issuances have moderated substantially since end-August. However, these interest rate impulses have yet to be transmitted by banks into lower lending rates
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