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Need structural reforms; see 6% inflation in 2015: RBI

Pitching for structural reforms to reinforce investor confidence, RBI Monday said falling inflation and political stability have helped check the macroeconomic vulnerabilities, while retail inflation is expected to stabilise near 6 percent level in 2015.

The central bank, however, flagged lower revenue mobilisation this fiscal as a “major concern” and said that the asset quality remains a grey area in the banking sector.

It also sounded caution over the recent phenomenon of FIIs showing greater interest in the Indian debt markets, saying this trend can turn volatile in the wake of changes in global markets, especially in the US, the world’s largest economy.

If the US surprises investors with changes in its monetary policy, there might be certain adverse impact on domestic markets, RBI said.

“On the domestic front, macroeconomic vulnerabilities have abated significantly in recent months on the back of improvement in growth outlook, fall in inflation, recovery in external sector and political stability,” the central bank said in its latest Financial Stability Report (FSR).

Inflation, a guiding factor which has resulted in the elevated rate structure, will be at 6 percent-mark for 2015, up from the 4.4 percent in November 2014, it said.

“The Reserve Bank’s latest projections suggest that CPI inflation over the next 12 months may hover around 6 percent if international crude prices remain at the current levels and monsoon next year turns out to be normal.”

The RBI acknowledged investor optimism over the India growth story and said the challenge ahead for the government is to deliver “commensurate structural reforms”.

The central bank, which has voiced its worry about the fiscal deficit, flagged lower revenue mobilisation this fiscal as a “major concern”.

As for the recent phenomenon of an increase in FII interest in Indian debt, RBI sounded caution, saying it can turn volatile, reacting to changes in global markets, especially in the US, the world’s largest economy.

If the US surprises investors with changes in its monetary policy, there might be certain adverse impact on domestic markets, it said.

On banking, the regulator said the risks remain unchanged from the last FSR (released in June 2014) and highlighted the need to contain the asset quality stress.

RBI said the gross non-performing assets (GNPA) ratio has gone up by 0.4 percentage points over the last six months to 4.5 percent in September and may improve to 4 percent by March 2016 if there is a sustained economic improvement.

However, the central bank sounded extremely concerned about the restructured assets, calling it a “cause of serious concern”.

Collation of data by the RBI showed that overall stressed assets, including the restructured ones and GNPA, have gone up to 10.7 percent as of September from 10 percent in March.

“The relatively higher possibility of slippages in restructured standard advances is required to be factored in by banks from capital adequacy perspective.”

How experts react

Rupa Rege Nitsure, chief economist and GM, Bank of Baroda said RBI has to warn about such things due to recurrence of similar episodes in global economy. Since India and Indonesia are preferred destinations among emerging markets, she dows not see any high probability of sudden reversal.

Nitsure, however, believes for India to continue to remain an attractive destination, prospects at the ground have to improve and though some efforts are happening, some political risks are also weighing on the economic policy making.

According to Shubhada Rao, chief economist, Yes Bank, India has adequately built its ammunition. Flows are getting better. So, to that extent from emerging markets and amongst BRICS nations India stands tall. “So, I don’t think we are going to expect huge outflows,” she adds.

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