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RBI: Monsoon still a concern though initial fears allayed

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New Delhi: While the monsoons so far have been able to diminish the fear of another year of drought, it still remains a concern for the country’s growth prospect as well as its inflation outlook, said the Reserve Bank of India (RBI) on Thursday. “While the progress of monsoon has allayed initial fears (of a drought), the uncertainty surrounding its progress and distribution remains a risk to the outlook for both growth and inflation”, the central bank said in its Annual Report for 2014-15. It suggested adopting inclusive and pre-emptive food management strategies in case a weak monsoon season hits this year. Taking into account initial conditions, including the prospects for the monsoon and for international crude prices, the RBI in April projected a baseline path for inflation in 2015-16 in which it would be pulled down from current levels by base effects till August but is expected to start rising thereafter to below 6.0 per cent by January 2016.

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“So far, inflation outcomes have closely tracked these projections. The risks to this trajectory are balanced as the weather-related uncertainties are offset by falling crude prices. Inflation developments will warrant close and continuous monitoring as part of the overall disinflation strategy that requires inflation to be brought down to 5 percent by January 2017,” the report said. According to the report, the outlook for growth is improving gradually with confidence in business remaining robust. The RBI said the government’s resolve on fiscal consolidation should propel efforts to reach the target for the gross fiscal deficit for 2015-16 at 3.9 percent. “Inflation developments will warrant close and continuous monitoring as part of the overall disinflation strategy that requires inflation to be brought down to 5 percent by January 2017. “Plans for disinvestment need to be front-loaded to take advantage of supportive market conditions, and also to forestall cutbacks in capital expenditure to meet deficit targets,” said the report. According to the RBI, the government’s resolve on fiscal consolidation should propel efforts to reach the target for the gross fiscal deficit for 2015-16 at 3.9 percent of GDP.

In the early months of the year, indirect tax collections have been robust and set to achieve budget estimates, though contingent upon a recovery in manufacturing and services. “Furthermore, plans for disinvestment need to be front-loaded to take advantage of supportive market conditions, and also to forestall cutbacks in capital expenditure to meet deficit targets. Such cut backs compromise the quality of fiscal consolidation. “States need to take advantage of the greater fiscal autonomy stemming from higher devolutions and prioritise capital and developmental expenditure so that the quality of sub-national fiscal correction is maintained,” the report said.

(IANS)

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RBI May Recoup Reserves, Strong Inflow of Foreign Funds And Benign Oil Prices Strengthening Indian Currency

A major factor supporting the rupee is the strong prospect of better fund flows from abroad.

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Experts now see a chance for the RBI to recoup the reserves it spent in 2018 defending the rupee. Pixabay

A strong inflow of foreign funds and benign oil prices have strengthened the Indian currency but what has worked best for the rupee is the fading impact of war hysteria. Experts now see a chance for the RBI to recoup the reserves it spent in 2018 defending the rupee.

Putting a number to this, Gurang Somaiya, currency analyst at Motilal Oswal, said: “It is possible that RBI may limit some of the appreciation and recoup some of its lost reserves… but it may only come if the rupee strengthens to around Rs 68.20 a dollar.”

Explaining the factors at play, Anindya Banerjee, Deputy Vice President for Currency and Interest Rates with Kotak Securities, said: “Post-Abhinandan (shooting down of the IAF pilot), geopolitical risk has subsided which has boosted investor sentiments.”

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The decline in crude oil, which accounts for a large import bill for India, directly affects the exchange rates.
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Banerjee added that the gains of the rupee will help the Reserve Bank of India recoup reserves which it lost last year in a bid to arrest its fall.

“The rupee appreciated and closed at 70.14 for the last week on the back of strong flows and fading impact of war hysteria,” said Sajal Gupta, Head Forex and Rates, Edelweiss Securities.

In addition, Gupta said that some “big flows are lined up next week. Maybe Arcelor Mittal money can hit the Indian markets which can lead to some more appreciation towards 69.50 unless the RBI intervenes”.

However, the rising dollar index is causing nervousness and any breakout may lead to a reversal in the rupee’s trend, said Gupta. Somaiya said that RBI may choose not to intervene as the central bank’s prime aim was to arrest volatility.

“Yes the rupee is inching below the 70-a-dollar mark but then the (general) election can cause massive volatility. Also, it is seen that a lot of central banks are getting into a dovish stance owing to the fears of global slowdown.”

The RBI had to stop the slump in the rupee late last year after it touched an all-time high of 74.47 on October 11 following the rising crude oil prices.

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However, the rising dollar index is causing nervousness and any breakout may lead to a reversal in the rupee’s trend, said Gupta. Somaiya said that RBI may choose not to intervene as the central bank’s prime aim was to arrest volatility. Pixabay

The Brent Crude touched $86-a-barrel mark in early October but started to ease following the US decision to exempt 8 countries, including India and China, to continue buying oil for six months from Iran despite sanctions.

The decline in crude oil, which accounts for a large import bill for India, directly affects the exchange rates.

A major factor supporting the rupee is the strong prospect of better fund flows from abroad.

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“Inflows into India have clearly turned positive since the end of January. The flows in February at Rs 17,720 crore is the highest since November 2017. The trigger for this inflows is the dovish statement that came from the Fed at the end of January,” said V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

India’s foreign exchange reserves stood at $401.78 billion as against $393.13 billion in November last year. As the data suggests, with improving macros, the forex is already on the recovery path. (IANS)