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Background
- Even as the economy slows down, the RBI has left its key policy lending rates unchanged while maintaining a “neutral” monetary policy stanc e.
Why did RBI take this step?
- The upside risks to inflation — rising international oil prices, uncertainties in pricing behaviour of firms post-GST and a patchy monsoon — did not leave it with many alternatives.
- RBI refrained from hawkishness due to the extraordinary concerns over growth.
- The RBI scaled down its growth estimates for 2017-18 from 7.3% to 6.7%.
Concerns about the economy
- The loss of momentum in the first quarter of 2017-18 and the first advance estimates of kharif foodgrain production are early setbacks which impart a downside to the outlook.
- The implementation of the GST so far appears to have had an adverse impact, especially on the manufacturing sector in the short term.
- This could further delay the revival of investment activity already impacted by the twin balance-sheet problem.
- A weakening consumer confidence further clouds the horizon.
- In terms of exports, India lags behind other emerging market peers.
- There are also risks from the normalisation of monetary policy by the US Federal Reserve later this year.
- That may well pose the risk of outflows considering that foreign portfolio investment in India has largely been in debt.
- Uncertainty on inflation.
What could be done by the government
- Speedily resolve the implementation problems linked to GST.
- Get stalled projects off the ground.
- Infusing more capital for banks to enable them to lend to firms, especially small and medium enterprises hurt most by the slowdown.
