Softening prices will support growth: RBI
India must sustain structural reforms to boost growth potential
India is poised to sustain its growth momentum in the current fiscal year, aided by easing price pressures, although risks emanating from sluggish expansion of other economies could pose risks, the Reserve Bank of India (RBI) said in its annual report on Tuesday.
The central bank attributed its optimism to strong macroeconomic policies, softer commodity prices, a robust financial sector, a healthy corporate sector, and the continued thrust on the quality of government expenditure in the fiscal policy.
However, it counts slowing global growth, long-drawn geopolitical tensions and a possible rise in financial market volatility as risks.
“It is important, therefore, to sustain structural reforms to improve India’s medium-term growth potential,” RBI said.
India’s banking regulator believes that the recent financial sector turmoil in the US and Europe requires a reassessment of risks to the financial stability and resilience of financial institutions during monetary policy tightening.
While Indian banks and nonbanking financial intermediaries remain sound and resilient, they need to stress-test for these new shocks, it said.
RBI called for a constant review and strengthening of capital buffers and liquidity positions. In that context, it plans to announce policy measures, such as guidelines on the introduction of an expected loss-based approach for provisioning in the current fiscal.
That apart, finalizing guidelines on the securitization of stressed assets and a comprehensive review of the prudential framework including guidelines on the resolution of stressed projects under implementation — are expected to be taken up this year to strengthen the resolution ecosystem.
“Domestic economic activity does face challenges from an uninspiring global outlook going forward, but resilient domestic macroeconomic and financial conditions, expected dividends from past reforms and new growth opportunities from global geo-economic shifts place India at an advantageous position,” it said.
The crowding-in effects of a sustained increase in government capex over recent years, RBI said, is expected to lead to higher private investment in FY24. The recent Union Budget has increased the capital expenditure outlay by 37.4%, with the railways receiving the highest ever capital outlay of ₹2.4 lakh crore.
RBI believes that softer global commodity and food prices, good rabi crop prospects, sustained buoyancy in contact-intensive services, double-digit credit growth, and receding drag on purchasing power from high inflation would propel real gross domestic product (GDP) growth to 6.5% in FY24.
India’s GDP is expected to grow by 7% in FY23, according to estimates by the National Statistical Office (NSO).
Risks to inflation, RBI said, have moderated with downward corrections in global commodity and food prices and easing of the pass-through from high input cost pressures of last year.
“With a stable exchange rate and a normal monsoon — unless an El Nino event strikes — the inflation trajectory is expected to move down over 2023-24, with headline inflation edging down to 5.2% from the average level of 6.7% recorded last year,” it said, adding that the monetary policy remains focused on the withdrawal of accommodation.
India’s retail inflation softened from 6.44% in February to 5.66% in March and 4.7% in April. On the external sector, RBI said it expects the current account deficit to remain moderate, owing to robust services exports and the beneficial impact of softening commodity prices of imports.
“With global uncertainties persisting, foreign portfolio investment (FPI) flows may remain volatile. The favourable domestic growth outlook, lower inflation, and business-friendly policy reforms could, however, help sustain buoyant FDI inflows,” it said.
RBI expects robust inward remittances due to improved growth prospects in Gulf countries, contributing to the reduction of external vulnerability risks in the current fiscal year.