New Delhi: The Reserve Bank of India (RBI) has endorsed the government’s optimistic sentiment about economic growth by retaining its 7.4% growth forecast for 2018-19 although inflationary concerns prompted it to raise the benchmark repo rate by 25 basis points to 6.5% and highlight the potential of minimum support price to fuel more price increases.

The central bank said in its third bi-monthly policy of the current fiscal year that various gauges suggest economic activity continues to be strong. “The progress of the monsoon so far and a sharper than the usual increase in minimum support prices of kharif crops are expected to boost rural demand by raising farmers’ income. Robust corporate earnings, especially of fast moving consumer goods (FMCG) companies, also reflect buoyant rural demand," RBI said in the policy statement. The central bank also projected a growth rate of 7.5% for first quarter of FY20.

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Union minister Arun Jaitley had in his budget speech in February said the IMF had projected the $2.5 trillion Indian economy would grow 7.4% in 2018-19. “We are now firmly on course to achieve high growth of 8% plus," the minister had said.

RBI’s bullishness on growth rate and concern regarding inflation is also in line with the Asian Development Bank’s (ADB) forecast for the current year. ADB said last week that India is expected to achieve its earlier growth forecasts of 7.3% in 2018-19 and 7.6% in 2019-20 as bank-strengthening bolsters private investment and benefits kick in from the goods and services tax (GST), while maintaining that increases in oil prices pose a downside risk to growth. In 2017-18, the Indian economy grew at 6.7%.

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ADB also raised its inflation projection for India to 5% from 4.6% for this financial year, on account of higher crude oil prices, depreciation of the rupee and increase in minimum support prices. RBI said the increase in MSP will have a direct impact on food inflation and second round effects on headline inflation, although the monsoon performance so far augurs well for food inflation. GST rate cuts will also have a sobering effect on inflation, RBI said while projecting consumer price index (CPI)-based inflation at 4.6% in September quarter, 4.8% in first half of FY19 and 5% in first quarter of FY20. The repo rate hike comes in the wake of CPI-based inflation accelerating by 5% in June, up from 4.87% in the preceding month.

The central bank had on 6 June raised the repo rate by 25 basis points to 6.25%—the first rate hike in more than four years—citing higher risks from rising inflation. Although the government does not give inflation outlook, it has maintained retail inflation has remained within the inflation target fixed of 4% with a two percentage points tolerance level either way.

Nikhil Gupta, chief economist at Motilal Oswal Financial Services, said both inflation and real GDP growth in the current financial year will be lower than RBI’s forecasts. “As we move closer to the elections, the uncertainty will also increase. We don’t expect further rate hikes in the remainder of FY19," said Gupta.

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