Economic recovery work in progress: Raghuram Rajan

Says there are signs that consumption demand, especially in urban areas, is picking up

The Reserve Bank today retained the growth projection for the current fiscal at 7.6 per cent, saying economic recovery is still work in progress though outlook is gradually improving.

The central bank's survey-based indicators point to flat capacity utilisation and new orders with corporate sales growth declining, although lower inflation justifies some of the compression in top lines.

In its third bi-monthly policy for the fiscal, RBI said although overall business confidence is positive, the level of optimism was shade lower in April-June than in the preceding quarter. Investment, as measured by new projects, is still weak, primarily because of persistently low capacity utilisation.

"In India, the economic recovery is still work in progress... The outlook for growth is improving gradually... On an assessment of the evolving balance of risks, the projected output growth for 2015-16 has been retained at 7.6 per cent," RBI Governor Raghuram Rajan said in the policy statement.

RBI said rural wage growth was moderate but there are indications of incipient pressures from corporate staff costs.

"However, there are signs that consumption demand, especially in urban areas, is picking up. Car sales for July were strong.

"Nominal bank credit growth is lower than previous years, but adjusted for lower inflation as well as for lower borrowing by oil marketing companies and increased borrowing from commercial paper markets, credit availability seems to be adequate for most sectors," the statement said.

On monsoon, the central bank said that after strong rainfall in June, July has been below par, but on net, the monsoon is near normal.

Higher reservoir levels also auger well for the prospects of kharif output, particularly for areas that are dependent on irrigation, it said.

Turning to the balance of inflation risks, RBI said "most worrisome" is the sustained hardening of inflation excluding food and fuel. Some food prices, particularly protein-rich items like pulses and oilseeds have risen sharply.

"They will have to be carefully monitored as they tend to be sticky and impart an upward bias to inflation and inflation expectations. This assumes significance in view of households' inflation expectations rising again," RBI said.

Several factors, however, could have a significant mitigating influence, Rajan said.

These include the sharp fall in crude prices since June and the likelihood of this softness persisting in view of the global supply glut and expanding production by Iran.

Other factors which could have an impact include "welcome increase" in planting of pulses and oilseeds and prospects of rainfall in August and September according to some forecasters.

Besides, the effects of the government's supply management to "contain shocks" to food prices, especially of vegetables, alongside its decision to keep increases in minimum support prices moderate could also have mitigating influence.