<div>Reserve Bank of India governor, Raghuram Rajan on Thursday (27 August) identified three areas as a “work in progress” – the economy, the fight against inflation and the ability of banks to cut interest rates.</div><div> </div><div>The central bank believes India's growth outlook is improving gradually and says the real activity indicators are backing its 7.6 percent gross domestic product (GDP) projection. In June, Mint Road had lowered the growth forecast for the current fiscal to 7.6 percent from 7.8 percent projected in April, citing various risks, including poor monsoon and rising crude oil prices.</div><div> </div><div>In the `Governor’s Overview: Annual Report (2014-15) – a first of its kind section -- Rajan noted: “First economic growth is still below levels that the country is capable of. Second, inflation projections for January 2016 (as of early August 2015) are still at the upper limits of RBI’s inflation objective. Third, the willingness of banks to cut base rates -- whereby they forego income on existing borrowers in order to attract more new business -- is muted; not only does weak corporate investment reduce the volume of new profitable loans, some bank capital positions, weakened by NPAs (non-performing assets) , may prevent them from lending freely”.</div><div> </div><div>The RBI Annual Report observed that the outlook for growth is improving gradually; business confidence remains robust, and as the initiatives announced in the Union Budget to boost investment in infrastructure roll out, they should crowd in private investment and revive consumer sentiment, especially as inflation ebbs. While the progress of the monsoon has allayed initial fears of moisture shortfall, uncertainty surrounding the progress and distribution of the monsoon remains a risk to the outlook for both growth and inflation.</div><div> </div><div>In the first four months of 2015-16, indicators of real activity have broadly tracked the RBI baseline projection of output growth (at basic prices) at 7.6 per cent for the year as a whole, up from 7.2 per cent in 2014-15.</div><div> </div><div>Taking into account initial conditions, including the prospects for the monsoon and for international crude prices, the RBI projected in April 2015 a baseline path for inflation in 2015-16 in which it would be pulled down from current levels by base effects till August but is expected to start rising thereafter to below 6.0 per cent by January 2016. “So far, inflation outcomes have closely tracked these projections. The risks to this trajectory are balanced as the weather-related uncertainties are offset by falling crude prices. Inflation developments will warrant close and continuous monitoring as part of the overall disinflation strategy that requires inflation to be brought down to 5 per cent by January 2017”, it said.</div><div> </div><div>On banking reforms, the Annual Report was clear that it will press ahead, however, tough it may be.</div><div> </div><div>“A regulatory view, fashionable in the past, was that the pace of regulatory reforms had to be limited by the capacity of our banks, especially our public sector banks. The current stress in the banking system suggests that the real economy will not wait for the banking system, and a slow pace of reform could lead to greater, rather than lower risk residing in the banking system. Financial sector reforms need to move on many fronts.</div><div> </div><div>It was pointed out that for a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk.</div><div> </div><div>“Wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create. The Chinese term this ‘Crossing the river by feeling the stones’. It is an appropriate metaphor to guide our own reforms”.</div>
