Monetary Policy: RBI expects GVA growth at 7.4%, CPI Inflation at 5% by FY18

While maintaining a status quo on its sixth bi-monthly monetary policy, the Reserve Bank of India (RBI) pointed out on economic factors like Gross Value Added (GVA) growth and Consumer Price Index (CPI) or Retail Inflation growth for the coming fiscal year (FY18).

GVA growth:

The central bank projected GVA growth at 7.4% in the fiscal year 2017-18, with risks evenly balanced.

It expects growth in GVA to be driven by four key measures.

Firstly, the impact of demonetisation on consumer demand is expected to bounce back beginning in the closing months of 2016-17. Secondly, economic activity in cash-related sectors like retail trade, hotels and restaurants, and transportation, along with unorganized sector will be restored rapidly.

Thirdly, the reduction in marginal cost-based lending rates (MCLR) by banks to lead for healthy borrowers, which is expected to uplift in both consumption and investment demand. Lastly, Union Budget 2017-18 vision on capital expenditure, and boosting the rural economy and affordable housing to contribute the growth.

Till the end of current fiscal, GVA growth is projected at 6.9%.

CPI Inflation:

Q1FY18 is expected to be muted for inflation due to favourable base effects and lagged effects of demand compression. Thereafter, inflation is expected to pick momentum, especially as growth picks up and the output gap narrows, stated RBI. 

RBI projected inflation in the range of 4.0 to 4.5% in the 1HFY18 and in the range of 4.5 to 5% in the 2HFY18.

Headline CPI inflation in Q4 of 2016-17 is likely to be below 5%, it said. 

However, RBI warned on some upside risk that may bring in some uncertainty to the baseline inflation path. They are - international crude prices, volatility in exchange rate which may result in upside pressures to domestic inflation; and the effects of the house rent allowances under the 7th Central Pay Commission (CPC) award which have not been factored in the baseline inflation path.