DELHI: Highlighting that the Reserve Bank of India's (RBI) policy stance will be 'firmly focussed' on keeping the economy on a disinflationary glide path, the central bank governor Raghuram Rajan on Tuesday kept all key rates unchanged in the monetary policy review.
"At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy," RBI said. "Furthermore, if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture," the bank added.
While repo rate was kept unchanged at 8%, Cash Reserve Ratio (CRR) and reverse repo rate were maintained at status quo of 4% and 7% respectively. On its part, the RBI cautioned against the persistent inflationary pressures to the economy, and highlighted that its main objective was to curb inflation.
In its outlook for growth and inflation, the RBI cited five key risks that can work as worrying factors for the economy in the year ahead. We take a look at them:
1) Economic growth drag: Despite some positive movement in more recent data, industrial activity continues to be a drag on the economy, with retrenchment in both consumption and investment demand reflected in the contraction of output of consumer durables as well as capital goods.
"Domestically, real GDP growth continued to be modest in Q3 of 2013-14, with some strengthening of activity in services such as trade, hotels, transport and communication, and financing, real estate and business services. In the quarters ahead, the boost provided by robust agricultural production in 2013 may wane," the bank said.
"Moreover, the outlook for the 2014 south-west monsoon appears uncertain. Sluggishness in industrial activity, exports and several categories of services underlines the need to revitalise productivity and competitiveness," it added.
2) Sticky retail inflation: Retail inflation measured by CPI moderated for the third month in succession in February 2014, driven lower by the sharp disinflation in food prices, although prices of fruits, milk and products have started to firm up.
"Excluding food and fuel, however, retail inflation remained sticky at around 8 per cent. This suggests that some demand pressures are still at play," the bank said.
3) Slowdown in export growth: For the year as a whole, RBI expects the CAD to be about 2.0 per cent of GDP. "Most recently, however, export growth has slowed, partly because of slowdown in demand in partner countries as well as a softening of prices of exports of petroleum products and gems and jewellery (offset by a reduction in the prices of oil and gold imports)," the bank said.
"Whether the export slowdown persists as global growth picks up once again remains to be seen," it added.
4) Risks to CPI inflation: According to RBI, there are risks to the central forecast of 8% CPI inflation by January 2015. "This risk stem from a less-than-normal monsoon due to possible el nino effects; uncertainty on the setting of minimum support prices for agricultural commodities and the setting of other administered prices, especially of fuel, fertiliser and electricity; the outlook for fiscal policy; geo-political developments and their impact on international commodity prices."
"There will also be a downward statistical pull on CPI inflation exerted by base effects of high inflation during June-November 2013," the bank added.
5) Downside risks to future growth: Contingent upon the desired inflation outcome, RBI has projected real GDP growth to pick up from a little below 5 per cent in 2013-14 to a range of 5 to 6 per cent in 2014-15 albeit with downside risks to the central estimate of 5.5 per cent.
"Lead indicators do not point to any sustained revival in industry and services as yet, and the outlook for the agricultural sector is contingent upon the timely arrival and spread of the monsoon. Easing of domestic supply bottlenecks and progress on the implementation of stalled projects already cleared should brighten up the growth outlook, as would stronger anticipated export growth as the world economy picks up," the bank said.