RBI Annual Report: Review and Prospects of Indian Economy
RBI Annual Report: Review and Prospects of Indian Economy
Question: RBI has released its annual report recently for the year 2014-2015. Discuss the review and prospects of the Indian economy as per this report.
Review
- Indian economy has remained resilient in international environment where financial volatility and lowered macroeconomic risks are working in tandem
- Marked increase in exchange rate volatility and the Greek debt crisis in 2014-2015 had moderate impact on the Indian economy
- External shocks influenced various segments of financial markets, asset prices and capital flows though the last of these remained buoyant
- Macroeconomic fundamentals of Indian economy improved over the year through lowered inflation and increased fiscal consolidation
- CAD narrowed in 2014-2015 from its level a year ago
- Pick up in the growth of GDP at market prices in 2014-2014 was mostly sustained by private consumption
- The boost in household financial saving and anticipated decline in government dissaving will work to release financial constraints in investment
- Weather influenced slowdown impacted agriculture on the production side causing impact on rural demand and instigating policy interventions for management of food price pressures
From June 2014, inflation fell more rapidly than anticipated due to the following factors:
- Collapse of global commodity prices
- Fall in tight crude
- Loss of price power among corporates on account of low demand
- Pro-active supply management and deregulation of key fuel prices
- Anti-inflation monitory stance
- There was a large surge in capital inflows which prompted liquidity management operations activity to sterilise the flow in accordance with monetary policy
- Competitive pricing conditions were leveraged during this period
- Revised liquidity management framework introduced in September 2014 improved money market rate alignment with policy repo rate
- Gilt yields fell indicating improved macro fundamentals in foreign exchange market
- Stock markets rally was observed throughout the year following foreign and domestic investor optimism
Prospects for 2015-2016
- Outlook for international economy has been negatively impacted by contraction in output in N America at the time of the first quarter of 2015
- During the second and third quarters, demand has picked up in advanced economies
- Hardening bond yields and risk premier ensured emerging economies will contend with volatile currency movements and capital flows
- This could pose a risk to international recovery: IMF has forecasted growth at 3.3% this year in its July update; this is lower than 2014
- Union Budget initiatives and business confidence are on the rise, boosting the prospects of the Indian economy
- RBI projects that in April 2015, baseline path for inflation would be pulled down by current levels through base effects till August and rise thereafter to below 6.0 percent capacity by 2016; inflation outcomes so far have closely tracked the projections
- Government resolve on reaching targets for gross fiscal deficit for 2015-2016 will reach 3.9% of the GDP
- Durable pick up in investment along with sustained efforts to alleviate supply constraints has led to positive expectations
- Comprehensive Bankruptcy Code of global standards will be released by 2015-2016 improving the business environment of India
- Gaps in distribution and worsening financials of power discoms must be met
- Expansion of gainful employment is also vital.
Facts and Stats
- Inflation expectations eased in 2014-2015 to single digit for first time since September 2009
- Moderating influence was exerted by wage pressures
- Slack revenue mobilisation prompted cutbacks in productive capital expenditures towards the close of the year
- Contraction in merchandise export was an area of concern in December 2014; savings may accrue as a result of POL and capital inflows
- Remittances from Indians abroad have led to weakened impact of global growth slowdown in the Indian economy
- Capital inflows exceeding external financing requirements raised international reserves to a new high at year end
