Inflation forecast raises scope of rate hike.

MUMBAI: The central bank's inflation forecast for the first half of FY19 is as high as 5.6 per cent, pointing perhaps to a likely increase in interest rates if prices were to accelerate faster. "CPI inflation for 2018-19 is estimated in the range of 5.1-5.6 per cent in H1, including diminishing statistical HRA impact of central government employees, and 4.5-4.6 per cent in H2, with risks tilted to the upside," the Reserve Bank of India (RBI) saidin its policy statement on Wednesday. 

A number of factors are helping stoke inflation concerns. These include upside risks to fiscal slippage, the proposed increase in minimum support price (MSP) levels, rising crude oil costs and resurgent global growth. The central bank has expressed a 'needfor vigilance' on inflation in thecoming months. "If inflation exceeds... forecasts in a sustained manner, a rate increase toward the second half of 2018 may not be ruled out," said Aditi Nayar, principal economist at ratings firmIcra. 

Turning to economic expansion, the RBI said that gross value added (GVA) for 2017-18 is projected at 6.6 per cent, down from the 6.7 per cent forecast madein itsDecember policy statement. GVA growth for 2018-19 is projected higher at 7.2 per cent overall--in the range of 7.3-7.4 per cent in H1 and 7.1-7.2 per cent in H2 -- with risks evenly balanced. 

The growth outlook for FY19 will be influenced by several factors. GST implementation is stabilising, which augurs well for economic activity, the central bank said. Besides, early signs of revival in investment activity are also visible as reflectedin improving credit offtake, large resource mobilisation from the primary capital market, and improving capital goods production and imports. 

The RBI also noted that the process of recapitalisation of public sector banks was underway, and that large distressed borrowers were being referenced for resolution under theInsolvency and Bankruptcy Code (IBC). "This should improve credit flows further and create demand for fresh investment," itsaid. 

Although export growth is expected to improve further on account of improving global demand, elevated commodity prices, especially of oil, may act as a drag on aggregate demand.