The central bank in its report predicted a bright that the near-term domestic outlook for 2015-2016.
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Reserve Bank of India Governor Raghuram Rajan’s Annual Report has said that India is yet to achieve its economic growth potential, with “the key weakness” for the country’s economy being investments by both the private and public sector, according to his foreword to the institution’s Annual Report.
RBI’s focus remains on bringing down inflation, while managing cash conditions and cleaning up the banking sector of soured assets would be its other priorities.
So far, the RBI has followed a gentle glide path, aiming at 5 per cent by March 2017 after having brought it below 6 per cent in January 2016, Rajan said.
RBI said the commitment of the central government to the path of fiscal consolidation in 2016-17 has enhanced the credibility of fiscal policy, which will, in turn, help in anchoring inflation expectations and in improving the business environment, including by fostering credibility among worldwide investors. “Certainly, the reluctance to lend to industry and small businesses is more visible among the more stressed public sector banks compared to the private sector banks”, Rajan said.
However, he said expectations of a good monsoon, coupled with more money in the hands of government servants (as a result of the implementation of the 7th Pay Commission recommendations), should boost the consumer demand.
He said economic growth, while showing signs of picking up, is still below the levels that the country is capable of. “Some support to industrial activity may, however, stem from the recent measures taken by the Government such as 100 per cent FDI in defence, civil aviation, pharmaceuticals and broadcasting”, RBI said.
RBI Governor Raghuram Rajan noted, in the Annual Report, that the room to cut policy rates can emerge only if inflation is projected to fall further.
On stressed assets Rajan said that while the asset quality review initiated in the last fiscal has improved recognition and provisioning of non-performing assets (NPAs), more focus needs on improving operational efficiency and creating the right capital structure for all shareholders.
On the Monetary Policy Committee, Rajan said: “This will be a welcome step forward in strengthening the transparency, continuity, and independence of monetary policy”. The effects of Brexit on the Indian economy have been relatively muted, including the immediate impact on equity and foreign exchange markets, it added.
However, in all these, there should be a caveat: “Some of the current difficulties come from an unrealistic application by banks of a scheme so as to postpone recognition of a loan turning NPA rather than because of a carefully analysed move to effect management or capital structure change”, the central bank governor said, warning, “RBI will continue monitoring to see that schemes are used as warranted”.
RBI will keep a close watch on the repayment of FCNR (B) bonds, even as the outlook for capital flows remained optimistic.
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Rajan said, RBI will continue to increase specialisation of its staff, while strengthening the performance evaluation system so as to identify weaknesses, and the skilling system so as to provide remedial action.
