The Reserve Bank of India (RBI) has warned about upside risks to inflation during the remaining part of the current financial year, ‘warranting vigil and readiness’ to deal with them.
The risks could emanate from rising commodity prices, especially crude oil, global financial market developments and second-round impact from revision of house rent allowance for central government staff.
“Headline inflation which averaged 4.8% during Q1:2018-19, is likely to face upside risks over the rest of the year from a number of sources,” the central bank said in its annual report released on Wednesday.
Inflation concerns have led RBI to raise the key policy rate, or the repo rate, twice in the last two monetary policy meetings by 25 basis points each, to 6.5%.
“A further rise in households’ inflation expectations in the June 2018 round of the Reserve Bank’s survey warrants caution, especially to prevent wage-cost spirals from developing,” the central bank cautioned.
RBI has projected headline inflation at 4.6% in Q2 of 2018-19; 4.8% in the second half of the year; and 5% for the first quarter of 2019-20, taking into account the HRA impact for the central government. The central bank said the stage is set for the ‘intensification of structural reforms that will unlock new growth energies and place the Indian economy on a sustainable trajectory of higher growth.’
‘Favourable conditions’
On growth, RBI said incoming data pointed to favourable conditions for an acceleration of activity in the Indian economy.
RBI said the Indian economy is set to step up its growth trajectory, adding that two aspects warrant priority if this aspiration is to be ‘realisable and sustainable.’ The first is infrastructure that holds the key to unleashing faster growth. “During 2018-19, this aspect of the infrastructure mission is set to accelerate. Second, even as infrastructure development provides the thrust, sustaining the momentum of growth will hinge around its inclusiveness and... its employment intensity.”
The pace and quality of growth will be anchored by progress on structural reforms over the medium-term, it said. These include resolution of banking and corporate financial stress, taxation, agriculture, liberalisation of the economy’s external interface and galvanising the business environment. “Hard-earned gains of macroeconomic stability that have defined the recent period as its greatest achievement need to be preserved as an imperative within this endeavour,” the report noted.
