RBI left its policy rates untouched and raised its inflation forecast for the second half of fiscal year 2018 (FY18) marginally to 4.2-4.6% in its policy from the earlier 4-4.5% in August. But it pruned the forecast for gross value added growth sharply to 6.7% from 7.3%.The revised inflation forecast is backed up by a series of upside risks that the central bank has listed. The accompanying monetary policy report suggests that the combined fiscal deficits of the states and the central government could potentially increase by 100 basis points owing to farm loan waivers. This could put considerable pressure on inflation. But the central bank is confident that growth will pick up in the third and fourth quarters and signs of this are already visible in the latest Purchasing Managers’ Index data. To be fair, RBI believes that it would take not less than four -six quarters for corporates to deleverage and banks to put a dent in stressed assets—the two main reasons for the investment slowdown. Given that the growth slowdown stems from comatose investment demand, something that RBI can do little to revive with token rate cuts, and the fact that inflation is rearing its head everywhere, future rate cuts are almost out of the window.

(Live Mint)