Central bank not yet alarmed at rain deficit

Reiterates in annual report its commitment to bring down inflation to 8% by Jan 2015

The Reserve Bank of India (RBI), in its annual report for 2013-14 (ending June 30), said the impact of this year’s deficient monsoon on growth, inflation and the fiscal and trade deficits was expected to be small. There are no significant departures in the inflation outlook from the baseline trajectory as indicated at the start of the financial year.

RBI said the monsoon deficiency in quantitative and qualitative terms is likely to be much less than that in 2009. “The marked improvement in monsoon since mid-July 2014 has reduced the likelihood of 2014-15 being a drought year but the final outcome would depend on the spatial distribution of rainfall in the rest of the season.”

The all-India cumulative rainfall deficiency in the current monsoon season till August 13 was placed at 18 per cent of the long period average as against an excess of 12 per cent in the corresponding period of last year. There has been a marked improvement in the monsoon since mid-July when the deficiency was 43 per cent.

Experts had flagged concerns that due to a deficient monsoon, containing of inflation might emerge as a challenge.

RBI is committed to bringing down inflation to eight per cent by January 2015 and six per cent by January 2016. “Though the balance of risks around the medium-term inflation path, and especially the target of six per cent by January 2016 are still to the upside, RBI remains committed to supporting the disinflationary process,” said the report.

RBI maintained its growth projection for 2014-15 in the range of five to six per cent, with risks broadly in balance around the central estimate of 5.5 per cent. This is in line with the projections made at the start of the financial year, though risks to the central estimate were more on the downside at that point.

“Signs of improvement in mining and manufacturing activity, expected pick-up in investment, improved availability of financial resources to the private sector with a lower draft of government on financial savings of households, amid fiscal consolidation, improved external demand and stabilising global commodity prices are expected to support recovery,” said the report.

At the same, RBI warned of downside risks if global recovery slowed, geopolitical tensions intensified or the monsoon weakened again in the rest of the season.

The business and investment climate in the economy is improving with the formation of a stable government at the Centre, a comparatively lower inflation and an improvement in global growth. “The Union Budget 2014-15 is supportive of both investment and savings,” said the annual report.

On the fiscal deficit, RBI believes it is likely to reduce further in 2014-15. “The budgetary targets are realisable, though concerted efforts will be necessary to achieve these targets,” said the report.

It expects the current account deficit to widen from the level in 2013-14 but to remain within a sustainable level. “As such, the risks associated with the twin deficits are expected to stay moderate,” said the report.