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Global outlook for inflation and trade remains areas of concern

By Parsa Venkateshwar Rao Jr

In its sixth bimonthly meeting, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), on February 8 kept the interest rate, the policy repo rate, unchanged at 6.25 per cent. Though the RBI announcement has conformed to the speculation that there would be no change in interest rate, the central bank statement says things that the Union Budget 2017-18 presented by Finance Minister Arun Jaitley has remained silent.

The MPC statement referred to the January 6 announcement that the Gross Value Added (GVA) for 2016-17 will be seven per cent, while the revised growth for 2015-16 was 7.8 per cent. While prospects for agricultural growth look positive because of the normal south-west monsoon and increased – 5.7 per cent – rabi acreage, the MPC statement says that there is “sharp deceleration” due to “slowdown in manufacturing and in mining and quarrying. Service sector has “lost pace”.

But there has been a noticeable upturn in November and December, 2016 as measured by the Index of Industrial Production (IIP), which is also reflected in the Purchasing Managers Index (PMI) of January 2017. But the MPC statement contrasts this with the 76th round of “Reserve Bank’s industrial outlook survey suggests that financing conditions facing the manufacturing sector have worsened in Q3 of 2016-17 and are expected to remain tight in Q4. This is corroborated by the sharp slowdown in bank credit to industry and continuing sluggishness in the investment climate in some sectors.”

The global economic environment is showing signs of improvement, according to the MPC. “Global growth is projected to pick up modestly in 2017” and that “Growth prospects for emerging market economies (EMEs) are also expected to improve moderately.” The other two areas of concern are inflation and challenges to global trade. With regard to inflation, the MPC statement notes, “Inflation is edging up on the back of rising energy prices and a mild firming up of demand” and that “global trade remains subdued due to an increasing towards protectionist policies and heightened political tensions.”

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