5 highlights of Raghuram Rajan's last RBI policy

Though the policy has maintained status quo across all levels,

the central bank's statement throws some interesting facts on the economy Living up to the market expectations, RBI governor Raghuram Rajan kept policy rates unchanged. With inflation ruling

at two-year high, few expected Rajan’s last policy to bring in any change. The central bank has also kept growth forecast at the same

level at 7.6 per cent.

Here are the five highlights from RBI’s policy.

1) Pick-up in rural economy:

Kharif sowing picked up after a lacklustre start as delayed monsoon picked up speed with cumulative rainfall being 3 per cent higher than the long period average and more than 80 per cent of the country receiving normal to excess precipitation. Barring cotton, jute and

mesta, sowing of all crops is currently above last year’s acreage.

These developments, RBI says gives greater confidence about the

near-term outlook for value added in agriculture.

2) Resilient manufacturing sector:

Barring the contraction in natural gas and crude oil on account of structural bottlenecks, the core sector has been resilient so far, and should support industrial activity going forward says the policy document. There are some signs of green shoots in manufacturing

with purchasing managers and the Reserve Bank’s industrial outlook survey indicating a pick-up in new orders, both domestic and external. Business confidence is also looking up in recent months, though the Reserve Bank’s survey for March 2016 suggests that capacity

utilisation, seasonally adjusted, is still weak.

3) Service sector holding up the economy:

RBI says that the robustness in service sector is gradually getting

broad based. Service sector purchasing managers polled the thirteenth successive month of expansion in July on the basis of a sharp acceleration in new business. Larger number of indicators are in acceleration mode in Q1 of 2016-17 than in the preceding quarter. Automobile sales across most segments, railway, port and

international air freight traffic, foreign tourist arrivals, and

domestic air passenger traffic are providing the underlying momentum for the upturn.

4) Hawkish stance on inflation:

Inflation at a two-year high continues to worry Rajan. Along with

rising prices of pulses and cereals services inflation remains sticky. There are early indications, however, that prices of vegetables are edging down. The strong improvement in sowing along with supply

management measures, augers well for the food inflation outlook,

points out RBI but at the same time warns that the prospects for

inflation excluding food and fuel are more uncertain and may trend upwards and counterbalance the benefit of the expected easing of

food inflation.

5) Bullish on domestic growth:

RBI has sounded bullish on domestic growth but has maintained its growth projection on account of global growth concern. The

momentum of domestic growth, says the policy document, is

expected to be quickened by the normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to consumption spending that can be expected from the disbursement of pay, pension and arrears following the implementation of the 7th CPC’s award.

The passage of the Goods and Services Tax (GST) Bill augurs well

for the growing political consensus for economic reforms. It should

raise returns to investment across much of the economy, even while strengthening government finances over the medium term, points out RBI.

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