The Reserve Bank on Thursday said uncertainty in the progress and distribution of monsoon, a key factor in performance of the farm sector, continues to be a risk for both growth as well as the inflation outlook.
"While the progress of monsoon has allayed initial fears (of a drought), the uncertainty surrounding its progress and distribution remains a risk to the outlook for both growth and inflation," the apex bank said in its Annual Report for 2014-15.
The report said that there is a need to put in place comprehensive and pre-emptive food management strategies to contain the spillovers of a feeble monsoon.
For the first four months of FY16, indicators of real activity have broadly tracked RBI's baseline projection of output growth at 7.6 per cent for the year as a whole, up from 7.2 per cent in FY15, it said.
Taking into account the initial conditions, including the prospects for the monsoon and international crude prices, the RBI had in April projected a baseline path for inflation at 6 per cent by January next during which time there would a dip due to base effects till August and start rising thereafter to below 6 per cent by January 2017.
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, the central bank said.
"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."
The RBI report said that for the economy, the outlook for growth is improving gradually.
Business confidence remains robust, and as the initiatives announced in the Budget to boost infra investments get rolled out, they should crowd in private investment and revive consumer sentiment, especially as inflation ebbs.
The RBI said the government's resolve on fiscal consolidation should propel efforts to reach the target for the gross fiscal deficit for 2015-16 at 3.9 per cent.
On the revenue side, the report noted a massive uptick (38 per cent till July) in indirect tax collections and maintained that achieving the Budget target is contingent upon a recovery in manufacturing and services sectors.
