In a detailed assessment of growth and inflation prospects for 2016/17, in its sixth bi-monthly monetary policy review (Feb.2), against the background of global uncertainties and weakening of demand in major emerging economies, Governor Dr Raghuram Rajan has projected only a modest rise in GVA (gross value added) at 7.6 per cent, as against 7.4 per cent in the current year.

He expects CPI target of 6 per cent in January 2016 to be met but caution underlies the expectation of keeping CPI around 5 per cent by March 2017. This projection of 5 per cent at the end of 2016/17 is on the assumption of a normal monsoon in 2016 and continuance of current level of international oil prices and exchange rates.

But this projection has not factored in, the impact of the 7th Pay Commission award which, RBI says, would impart upward momentum to the CPI trajectory for one to two years. The central bank would therefore have to readjust the inflation forecast path as and when more clarity emerges on the timing of implementation. It is also linked with the behaviour of monsoon and the impact of adverse geo-political events on commodity prices and financial markets, all adding to more uncertainty to the baseline.

By leaving the repo rate unchanged, RBI says the present policy continues to be accommodative while awaiting further data on the development of inflation. The expectation remains that structural reforms in the forthcoming Union Budget that create more space for monetary policy to support growth would also ensure that inflation remains on the projected path of 5 per cent by the end of 2016-17.

The policy lending rate (repo) is unchanged at 6.75 per cent and the reverse repo rate at 5.75 per cent. The marginal standing facility (MSF) rate and the Bank Rate would also continue at7.75 per cent. CRR (Cash Reserve Ratio) of scheduled banks would remain at 4 per cent of net demand and time liabilities.

In line with recent pronouncements of Governor Dr Rajan on the need to safeguard macro-economic stability at a time of economic disarray in other emerging economies and global growth and trade slowdowns, the Policy Review makes a strong statement on 'fiscal rectitude' in the wake of recent debate whether greater priority should be given to growth over fiscal consolidation.

It said the Indian economy is currently being viewed as 'a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened'.

On the domestic front, RBI assessment says economic activity lost momentum in Q3 of 2015-16, pulled down by slackening agricultural and industrial growth. Industrial activity slowed reflecting weak investment demand and stalled projects continued to remain high. With low capacity utilisation, new investment intentions were few. A modest expansion of activity is considered likely in the last quarter beginning January 2016.

Taking a rather bleak view of the state of economy at present, the RBI Policy Review hopes for a gradual strengthening of growth in 2016/17 'notwithstanding significant headwinds'. Growth is projected on the expectation of a normal monsoon after two consecutive years of rainfall deficiency, positive terms of trade gain, improving real incomes of households and lower input costs of firms.

Nevertheless, concerns are expressed over the still weak domestic private investment demand in a phase of balance sheet adjustments by stressed corporates, status of stalled projects, and sluggish external demand conditions dampening export growth. RBI has based its estimate of Gross Value Added (GVA) at 7.6 per cent for 2016/17 on an assessment of the balance of risks.

However, RBI tends to regard the current momentum of growth as reasonable, though below what should be expected over the medium term. Underlying growth drivers need to be rekindled to place the economy durably on a higher growth trajectory. The revival of private investment, in particular, has a crucial role, especially as the climate for business improves and fiscal policy continues to consolidate.

On India's external account, despite contraction of exports and widening of trade deficit the overall current account deficit is likely to remain well contained and easily financed. Net foreign direct investment (FDI) and non-resident deposits have remained robust in relation to last year.

But this assumption must reckon with the fact that the persisting decline in oil prices may affect the flow impact the flow of remittances from the Gulf region where fiscal positions of oil-exporting countries are deteriorating rapidly.

India also saw portfolio outflows in recent months. Still, as of January 22, India's foreign exchange reserves had only marginally declined from a peak of a little over 350 billion dollars to 347.6 billion, a net addition of 5.9 billion dollars in the first ten months of 2015/16. While India is sufficiently cushioned to overcome any spillovers from China's slowdown or other financial market turmoils, exchange rate management would remain am area needing special attention in view of volatile exchange rates and rise in US interest rates by the Federal Reserve expected at intervals during 2016. (IPA Service)