The Reserve Bank of India (RBI) has retained its growth estimate for 2014-15 at 5.5 per cent.
The reiteration of growth estimate is based on its expectation of a normal monsoon. Also, the apex bank is hopeful that there will not be any adverse supply or financial shocks.
While keeping the policy rates unchanged in its fifth bi-monthly policy, the RBI said conditions for a turnaround "are gathering." Nevertheless, it did concede that "activity appears to have lost some momentum in Q2, probably extending into Q3."
The RBI pointed to the softening of inflation, easing of commodity prices/ input costs, comfortable liquidity conditions, and rising business confidence as well as purchasing activity.
"These conditions could enable a pick-up in Q4 if co-ordinated policy efforts fructify in dispelling the drag on the economy emanating from structural constraints,’’ it said.
"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,’’ it said. The success of ongoing government actions in these areas wouldl be key to reviving growth and offsetting downside risks emanating from agriculture – in view of weaker-than-expected Rabi sowing – and exports – given the sluggishness in external demand, it added.
The apex bank said some easing of monetary conditions had already taken place. The weighted average call rates as well as long-term yields for government and high-quality corporate issuances had moderated substantially since end-August, it said. "However, these interest rate impulses have yet to be transmitted by banks into lower lending rates,’’ it pointed. Slow bank credit growth was mirrored by increasing reliance of large corporations on commercial paper and domestic as well as external public issuances, it pointed out.
It admitted that weak demand and the rapid pace of recent disinflation were factors supporting monetary accommodation. "The weak transmission by banks of the recent fall in money market rates into lending rates, however, suggests monetary policy shifts will primarily have signaling effects for a while," it said. These signaling effects wre likely to be large since the Reserve Bank had repeatedly indicated that once the monetary policy stance shifted, subsequent policy actions would be consistent with the changed stance. "There is still some uncertainty about the evolution of base effects in inflation, the strength of the on-going disinflationary impulses, the pace of change of the public’s inflationary expectations, as well as the success of the government’s efforts to hit deficit targets," it cautioned. As such, a change in the monetary policy stance at the current juncture was premature, it said. "However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle," the RBI said.