The Reserve Bank of India has emphasised the need to preserve macroeconomic stability in the Indian economy, in a year where external headwinds are on the rise and inflation is trending higher.
Giving an outlook for 2018-19 in its annual report, the central bank said that it expects a step-up in the growth trajectory domestically. However, the year may also be marked by increased global and inflation risks, the RBI said.
Growth ‘Step-Up' Seen
The RBI expects the Indian economy to see stronger growth in the current year with a pick-up in both investment and consumption activity.
The Indian economy is set to step up its growth trajectory, said the central bank while explaining that conditions have improved over 2017-18. Significant support to growth has come from gross fixed capital formation, which snapped out of a four-quarter soft patch and expanded between second and fourth quarters of FY18. This was supported by an increase in consumption expenditure due to strong rural demand and the government's thrust on rural housing and infrastructure, said the RBI.
For the growth momentum to sustain going forward, infrastructure holds the key.
First, infrastructure holds the key to unleashing the impulses of faster growth. In particular, the reasonable success achieved in the transportation space is worthy of emulation in other areas....Second, even as infrastructure development provides the thrust, sustaining the momentum of growth will hinge around its inclusiveness and, in particular, its employment intensity.RBI Annual Report 2017-18
External Headwinds
While domestic economic conditions remain stable, the RBI acknowledged that global headwinds are likely to confront India's external sector in 2018-19.
“Even though exports have gathered momentum in Q1 of 2018-19, the worsening global trade environment as a result of protectionist policies may impinge upon external demand,” noted the central bank.
It added that elevated crude oil prices and the strengthening of domestic demand may push up the import bill. The RBI, however, sounded a confident note on the current account deficit, saying that it is expected to be largely financed by foreign direct investment flows.
India's current account deficit is expected to widen to near 2.7-2.8 percent of GDP in 2018-19, according to economists. With portfolio flows remaining volatile, economists expect the balance of payments to weaken and put pressure on the rupee.
The firming profile of international commodity prices – especially of crude oil, spillovers from tightening global financial conditions, geo-political tensions, trade wars stirring up across borders, financial turbulence, and the overhang of impairment in domestic banking and corporate balance sheets, emerge as the key downside risks.RBI Annual Report 2017-18
Vigil On Inflation
Headline inflation averaged 4.8 percent in the first quarter but is likely to face “upside risks over the rest of the year”, cautioned RBI.
These risks could emerge from a number of sources and warrant “continuous vigil”, the central bank said. Some of the risks include higher oil prices, the firming up of input cost pressures and the impact of higher house rent allowances.
“Much will depend on how food prices play out and how effective are the supply management strategies,” said the RBI as it called for “readiness to head off those pressures from getting generalised.”
The Monetary Policy Committee has raised rates twice this year to keep inflation pressures in check. Most economists expect that the MPC will now pause to see how inflation readings play out.
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