India to grow at 7.6% in FY'17: RBI

It is expected to trend towards 5% target by the last quarter of year, although at current juncture, upside risks are prominent

The near-term growth outlook for India seems brighter than last fiscal and the economy is likely to expand at 7.6 per cent in 2016-17, the Reserve Bank said on Monday.

"Overall GVA (gross value added) growth is projected at 7.6 per cent in 2016-17, up from 7.2 per cent last year," RBI said in its Annual Report 2015-16.

A better than anticipated agricultural performance and the possibility of allowances under the 7th Pay Commission's award being paid out in the fourth quarter of 2016-17 provide upsides to this projection, it said.

On the other hand, a rise in the implicit GVA deflator, as Wholesale Price Index (WPI) based inflation hardens, will operate as a statistical downside, RBI said.

The effects of Brexit on the Indian economy have been relatively muted, including the immediate impact on equity and foreign exchange markets, it added.

Yet, in view of the linkages to the UK and the euro area, spillovers through trade, finance and expectations channels cannot be ruled out as events unfold, it said.

"Abstracting from these external shocks, the near-term domestic outlook appears somewhat brighter than the outcome for 2015-16," RBI said.

While a durable pick-up in investment activity remains elusive, consumption will continue to provide the main support to aggregate demand and may receive a boost from the revival of rural demand in response to the above-normal and spatially well-distributed southwest monsoon as well as from the seventh pay commission's award, it said.

Industrial activity has been in contraction mode in the early months of 2016-17, pulled down by manufacturing and looking ahead, no strong drivers are discernible at this juncture that could engineer a turnaround.

"Some support to industrial activity may, however, stem from the recent measures taken by the Government such as 100 per cent FDI in defence, civil aviation, pharmaceuticals and broadcasting," RBI said.

The headline inflation, it said, is expected to trend towards the target of 5 per cent by the last quarter of the year, although at the current juncture, upside risks are prominent.

"If the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation," it said.

RBI said it is also important to take note of impact of the implementation of the Seventh Pay Commission's award on the future trajectory of headline inflation.