The decision of the Reserve Bank of India on Wednesday to keep key policy rates unchanged is in line with the expectations of analysts and financial markets. It is also a key pointer to the near-term prospects of the economy. The uptick in inflation or the reversal of its trajectory, and the fact that the government’s fiscal deficit has already crossed 96.1 per cent of the budget estimate for 2017-18, signals that there is little scope for monetary easing or a fiscal stimulus. The Monetary Policy Committee, therefore, chose to maintain a “neutral” policy stance, projecting a relatively higher inflation of 4.3 to 4.7 per cent in the next two quarters while going with the earlier GVA (Gross Value Added) estimate of 6.7 per cent for FY 18, taking into account the upward pressure on food and fuel prices.
The MPC and other analysts reckon that oil prices, already at well over $50 a barrel, may sustain, with the risk of a negative impact on margins of companies and, in turn, on growth. Food prices, too, were high in October, especially perishables like vegetables, though this should moderate in the winter months. Coupled with that is the RBI’s own survey of households, which indicates a firming up of inflation expectations in the year ahead and the risks arising from global financial instability because of fiscal expansion in the US and monetary policy normalisation in advanced economies, and the signs are clear: Policy support to growth can be discounted for now.
Indeed, the central bank has said that the risks are evenly balanced in terms of the growth projection of 6.7 per cent for this fiscal after flagging the impact of lower revenue because of a reduction in GST rates for many goods and services, farm loan waivers by states and the partial rollback of excise duty and VAT on petroleum products. The RBI says it has seen an uptick in credit growth in October and expects demand to rise in the next two quarters, with its own industrial outlook survey indicating a pick-up in the third quarter. Much of the hopes will now have to be pinned on private investment. For that to get ticking, the government should work at further easing the procedures for the GST and focusing on micro regulation.
Last time around, in October, the RBI flagged concerns relating to the implementation of the GST saying that it appeared to have had an adverse impact, rendering the prospects for the manufacturing sector uncertain in the short term and thus further delaying the revival of investment activity. Since then the GST Council and the government have moved to address the glitches and plug gaps in the insolvency law. Now with the government and the RBI readying to fortify banks with more capital, there could be a recovery down the line. But the wait may be longer than what many had projected at the start of this fiscal.