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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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Slow Pace of Private Investment, High Finance Costs Impact India’s Economy

"Sales might turn positive in August as the liquidity situation is expected to improve"

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A sovereign bond is a debt security issued by a national government and is either denominated in foreign or domestic currency. Pixabay

Consumption driven growth might become an unintended beneficiary of the government’s plans to raise a part of its gross borrowings from external markets. Presenting the Union Budget 2019-20 last Friday, India’s Finance Minister Nirmala Sitharaman proposed to raise a part of the government’s gross borrowings from abroad.

The budget proposal is expected to free-up additional liquidity in the domestic market and lower interest rates. Consequently, it will provide consumers and industry with cheaper access to finance.

According to Edelweiss Securities Lead Economist Madhavi Arora, lower interest rates wil aid consumer driven sectors which have been bogged down due to subdued demand.

Currently, the economy suffers from rural distress, slow pace of private investment and high finance costs. These together have subdued consumer sentiment and further impacted everything from car sales to air passenger traffic. This in turn has impacted production levels and further stalled hiring and wage levels.

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“India’s sovereign external debt to GDP is among the lowest globally at less than 5 per cent,” Sitharaman said in her maiden Budget speech in Parliament. Flickr

The slowdown has impacted the automobile sector the hardest. The off-take data for May showed that domestic passenger car sales were down 26.03 per cent to 147,546 units. “Issuance of sovereign bonds should ideally free up resources available for production needs at a reduced cost,” explained Grant Thornton India Partner Sridhar V.

“Government’s move to issue sovereign bonds by itself is an indication of its confidence in the macro fundamentals and could boost economic activity.” However, Kavan Mukhtyar, Partner and Leader – Automotive, PwC India cited the need for further liquidity infusion.

“Cheaper interest rates (as an impact of government’s external borrowings) will aid in lowering the ownership cost. However, the need of the hour is to increase the availability of liquidity through NBFCs (non-banking finance companies) and banks,” Mukhtyar said.

“Sales might turn positive in August as the liquidity situation is expected to improve.” Off-loading sovereign bonds is a mechanism available to governments for raising cheaper funds from international markets.

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“Sales might turn positive in August as the liquidity situation is expected to improve.” Pixabay

A sovereign bond is a debt security issued by a national government and is either denominated in foreign or domestic currency. “India’s sovereign external debt to GDP is among the lowest globally at less than 5 per cent,” Sitharaman said in her maiden Budget speech in Parliament.

“The government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have a beneficial impact on the demand situation for government securities in the domestic market,” she added.

This will be a first such bond issuance. In 2013, the government had considered the idea, but never implemented it. At that time, the country was faced with major fiscal and current account deficits.

Instead, the Reserve Bank of India at that time announced a scheme to incentivise foreign currency non-resident (FCNR) deposits, which brought in nearly $34 billion. As a result, most of India’s debt is rupee-denominated.

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Instead, the Reserve Bank of India at that time announced a scheme to incentivise foreign currency non-resident (FCNR) deposits, which brought in nearly $34 billion. As a result, most of India’s debt is rupee-denominated. VOA

The government’s latest move is being seen as prudent in the face of limited options to raise funds as a slowing economy curtails tax revenue, while the borrowing target of a record Rs 7.1 trillion ($104 billion) this fiscal year remains a tough task.

ALSO READ: Is Budget 2019-20 a Hope for India’s Development?

“It will aid the sector to a limited extent. While the interest is low, transmission of cheap capital in the system is important, which takes time,” said Rahul Mishra, Principal, A.T. Kearney.

“Also, given the NBFC crisis, the overall availability of capital is very limited and whatever capital is available, it has strong checks and collateral requirement. A combination of low interest, eased out lending norms and better transmission of money will have a positive impact on consumption sectors over a 3-6 month period,” he added.  (IANS)