Seasonal spurt in vegetable prices next month could partly reverse the benefits of low global oil prices reducing inflation and increasing disposable incomes, the Reserve Bank warned on Tuesday.
"The sharp reduction in oil prices as well as in inflation is likely to increase personal disposable incomes and improve domestic demand conditions in the year ahead," the central bank said in its monetary policy document.
Inflation, excluding food and fuel, declined for the second consecutive month in December. This was largely on account of the declining prices of transport and communication since August, reflecting the impact of plummeting global crude oil prices, and softer commodity prices more generally.
"However, seasonal increases in vegetable prices, which typically set in around March, have to be monitored carefully," RBI said, adding that the retail inflation is likely to be around the target level of 6 per cent by January 2016.
The upside risks to inflation stem from the unlikely possibility of significant fiscal slippage, uncertainty on the spatial and temporal distribution of the monsoon as also the low probability but highly influential risks of reversal of crude prices due to geo-political events, it said.
Referring to economic activities, it said the revision in the base year for GDP and calculation methods will mean some revision in GDP numbers for 2014-15 as well as in forecasts.
However, RBI has retained the baseline projection for growth (using the old GDP base) at 5.5 per cent for 2014-15 and 6.5 per cent for next fiscal.
RBI said advance indicators of industrial activity, like indirect tax collections and expansion in order books point to a modest improvement in the months ahead.
"Policy initiatives in land acquisition, as well as efforts underway to unlock mining activity and to widen the space for FDI in defence, insurance and railways, should create a more conducive setting for industrial revival," it said.
Faster clearances are also helping in resuscitating stalled projects and the "improvement in business confidence" is visible in a pick-up in new investment intentions, especially in transportation, power and manufacturing.
Overall, RBI added that the growth prospects will be contingent upon a turnaround in investment and a durable improvement in the business climate to complement the upsurge in business optimism.
