RBI lowers GDP forecast for FY16 to 7.4%

Expects CPI inflation to average 5.5% in Q3 and 5.8% in Q4 of FY16

The Reserve Bank today revised downwards its real GDP forecast for 2015-16 to 7.4% from earlier expectation of 7.6%, saying that growth is expected to pick up in the latter part of the fiscal.

"Overall, lead/coincident indicators, the forward looking surveys and estimates from model-based forecasts warrant a downward revision of Gross Value Added (GVA) growth to 7.4% in FY16 from the projection given in the April Monetary Policy Report (MPR)," RBI said in its monetary policy report.

It said growth in real GVA at basic prices is expected to be around 7% in the third quarter of 2015-16 before firming up to around 7.6% in the fourth quarter with risks evenly balanced around this projection.

The report, however, said real GVA growth is expected to pick up gradually in 2016-17 on a shallow cyclical upturn, driven by an expected normal monsoon and some improvement in external demand, but assuming no structural changes induced by policy measures and the absence of major supply shocks.

"The current environment of soft global commodity prices provides a potential upside bias to the growth projections," the report said.

It said headline CPI inflation is expected to firm up from its current trough and rise to around 4.5% in September as favourable base effects reverse and average 5.5% in the third quarter and 5.8% in the fourth quarter of FY16.

"Assuming that various determinants of inflation evolve in the manner posited by staff in this MPR, especially the evolution of global crude oil and domestic food price dynamics, CPI inflation is expected to average 5.5% in FY17 and moderate to around 4.8% in Q4 of FY17," the report said.

The baseline outlook, however, is subject to considerable uncertainties surrounding commodity prices, monsoon and weather-related disturbances, volatility in seasonal items and spillovers from external developments through exchange rate and asset price channels.