RBI cuts FY17 growth forecast to 6.9%, pegs 7.4% for FY18

RBI kept key rates unchanged as it wants to assess how transitory effects of note ban on inflation

Reserve Bank of India Governor Urjit Patel on Wednesday cut the economic growth forecast to 6.9 per cent for the current financial year from 7.1 per cent estimated earlier, even as he said the economy will bounce back to 7.4 per cent rate next financial year.

The RBI kept key interest rates unchanged saying it wants to assess how the transitory effects of demonetisation on inflation and the output gap play out.

"GVA (gross value added) growth for 2016-17 is projected at 6.9 per cent with risks evenly balanced around it. Growth is expected to recover sharply in 2017-18 on account of several factors. GVA growth for 2017-18 is projected at 7.4 per cent, with risks evenly balanced," the RBI said in its sixth bi-monthly monetary policy statement.

In its last monetary policy on December 7, 2016, the central bank had cut growth forecast to 7.1 per cent, from its earlier projection of 7.6 per cent for this financial year.

The apex bank said that discretionary consumer demand held back by demonetisation is expected to bounce back in the closing months of 2016-17.

Economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, transportation as well as in the unorganised sector is expected to be rapidly restored, the RBI said.

"Demonetisation-induced ease in bank funding conditions has led to a sharp improvement in transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs), and in turn, to lending rates for healthy borrowers, which should spur a pick-up in both consumption and investment demand," it added.

The apex bank said the emphasis in the 2017-18 Budget was on stepping up capital expenditure and boosting the rural economy and affordable housing, which will contribute to the economic growth.

The RBI projection of 6.9 per cent GVA growth for current financial year comes on the back of the Economic Survey last week forecasting economic growth of 6.5 per cent.

The Central Statistics Office (CSO), in its advance estimates for 2016-17 on January 6, placed real GVA growth at 7 per cent for the year, but it did not take into account the impact of demonetisation on economic activity.

The growth forecast of 7.4 per cent in 2017-18 is on the upper end of the 6.75 to 7.5 per cent band estimated in the Economic Survey.