The ADB report also sees the Indian economy recovering to grow at 7.3 per cent in 2018 and 7.6 per cent in 2019, aided by growth-oriented policy measures.
New Delhi: The Reserve Bank of India is likely to keep benchmark policy rates unchanged through 2018, the Asian Development Bank (ADB) has said in its ‘development outlook’ report released Wednesday.
The ADB forecast comes amid expectations of tightening of monetary policy because of rising inflation risks.
“The status quo is likely to hold in FY2018 albeit with some risk of monetary tightening,” the report says.
ADB defines FY 2018 as the period between April 2018 and March 2019.
With the central government postponing its fiscal consolidation drive, upside risks to inflation and expected increases in US interest rates in 2018, the ADB sees limited room for policy rate cuts to stimulate growth.
However, at the same time, the odds of a rate increase are low with the central bank indicating tolerance for slightly higher inflation and recognition of the need to nurture recovery.
In the April monetary policy, RBI adopted a more dovish policy stance by cutting the inflation forecast for the first half of this fiscal to 4.7-5.1 per cent from the previous projection of 5.1-5.6 per cent.
Similarly, the projection for the second half of the fiscal was cut from 4.5-4.6 per cent to 4.4 per cent. However, out of the six monetary policy committee members, Dr Michael Debabrata Patra voted for an increase in the policy rate of 25 basis points.
The rebound in global oil prices is likely to intensify the pressures on inflation and pose a risk in the near term.
GDP growth
The ADB report also sees India reversing two years of declining growth trend and the economy recovering to grow at 7.3 per cent in this fiscal (2018) and 7.6 per cent in the next fiscal (2019) aided by growth-oriented policy measures.
“Despite the short-term costs, the benefits of reform — such as the recently implemented GST — will propel India’s future growth,” said Yasuyuki Sawada, ADB’s chief economist.
“Robust foreign direct investment flows attracted by liberalised regulations, and the government’s steps to improve the ease of doing business will further bolster growth,” Sawada added.
“Teething issues related to implementation of the Goods and Services Tax (GST), which hampered operations of small and medium-sized enterprises and exporters, also contributed to growth moderation,” the report says.
Inflation risks
The ADB report says with global oil prices forecast to increase by 19.7 per cent in 2018, decontrolled prices for fuels are expected to go up.
“This will spill over into transportation and add some 30 basis points to inflation,” it says.
In addition, an increase in minimum support price (MSP) by 1.5 times announced by the central government in the budget for 2018-19 will add an upward pressure to the inflation risk.
“The proposed increase in procurement prices will add to inflation, though the impact will depend on the size of the proposed increase. Any strengthening of rural wages may affect retail food prices,” the report says.
However, the report says prospects of a good monsoon and a moderate increase in global food prices along with government’s effort to improve agricultural supply management promise to ease the inflationary pressure.
The ADB has forecast an average inflation of 4.6 per cent in 2018 and sees a rise in inflation to 5 per cent in 2019 with further firming up of global commodity prices and strengthening of domestic demand.