Favourable domestic factors to accelerate growth: RBI

Mumbai: The Reserve Bank of India on Thursday said economic growth in the current fiscal will accelerate to 7.4 percent compared to 6.7 percent in 2016-17 on the back of several favourable domestic factors and improvement in global environment.

In its first bi-monthly monetary policy of 2017-18, it said several indicators are pointing to a modest improvement in the macroeconomic outlook.

These include record production of foodgrains and pulses and recovery in industrial output on the back of turnaround in the manufacturing sector. Also, activity in the services sector appears to be improving as the constraining effect of demonetisation wears off.

"GVA (Gross Value Addition) growth is projected to strengthen to 7.4 percent in 2017-18 from 6.7 percent in 2016-17, with risks evenly balanced," the policy statement said. It had made a similar projection in the previous policy announcement.

Several favourable domestic factors are expected to drive this acceleration.

"First, the pace of remonetisation will continue to trigger a rebound in discretionary consumer spending. Activity in cash-intensive retail trade, hotels and restaurants, transportation and unorganised segments has largely been restored," it said.

It further noted that significant improvement in transmission of past policy rate reductions into banks' lending rates post demonetisation should help encourage both consumption and investment demand of healthy corporations.

Various proposals in the Union Budget should stimulate capital expenditure, rural demand, and social and physical infrastructure, all of which will invigorate economic activity, the RBI said.

"The imminent materialisation of structural reforms in the form of rollout of GST, the institution of the Insolvency and Bankruptcy Code, and the abolition of the Foreign Investment Promotion Board will boost investor confidence and bring in efficiency gains," the document said.

The upsurge in initial public offerings in the primary capital market augurs well for investment and growth as well.

The RBI further said the global environment is improving, with global output and trade projected by multilateral agencies to gather momentum in 2017.

"Accordingly, external demand should support domestic growth," it added.

On the other hand, the downside risks to the projected growth path stem from the outturn of the South-West monsoon, the central bank said.

Also, ebbing consumer optimism on the outlook for income, the general economic situation and employment as polled in the March 2017 round of the Reserve Bank's consumer confidence survey and commodity prices pose downside risks to growth.