Asian Development Bank (ADB) expects the RBI to go for another round of rate cut in the latter part of 2017-18 in view of sluggish economic activities but does not see the possibility of any major fiscal stimulus.
The Monetary Policy Committee of the Reserve Bank reduced the key interest rate (repo) by 25 basis points to 6 per cent in August. The committee is scheduled to come out with next bi-monthly monetary policy decision on October 4.
"With inflation within the central bank target range of 26 per cent and economic activity weakening in January-June 2017, the latter part of the fiscal year offers some scope for additional monetary easing," ADB said in a report.
In its 'Asian Development Outlook 2017 Update', the Manila-based multilateral lending agency had reduced India's GDP growth forecast for the current fiscal to 7 per cent from 7.4 per cent owing to weakness in private consumption, manufacturing output and business investment.
As per the latest data released by the Indian government, the country's growth fell to a 3-year low of 5.7 per cent in the April-June quarter of 2017-18.
Finance Minister Arun Jaitley recently said the government would come out with additional measures to boost economic activities, thus raising expectations of a fiscal stimulus package.
However, ADB said fiscal stimulus "is less likely with the government having exhausted 92.4 per cent of the full fiscal year deficit to cover slippage in non-tax revenue due to slow progress in achieving disinvestment targets".
"Meanwhile, the scope for cutting back expenditure is limited," the report.
As per the updated report, India's inflation is expected to average 4 per cent in 2017-18, significantly lower than the the April forecast.
Higher global food and fuel prices and improved aggregate demand are likely to push inflation to 4.6 per cent in 2018-19, though still below the earlier forecast, it said.
The ADB report further said as government efforts to resolve banks' NPAs yield results and corporations continue to deleverage, "credit flow to industry and services is expected to increase".
The expected uptick in consumption augurs well for capacity utilisation and should attract fresh investment, it said.