India's growth is set to rise to 7.5 percent in the fiscal year 2016-17 from 7.3 percent in the year ending March 31, helped by large terms of trade gain, positive policy actions and reduced external vulnerabilities, the International Monetary Fund said Wednesday.
"With the revival of sentiment and picking up of industrial activity, an incipient upturn in private investment is expected to help broaden the recovery," the lender said in its Article IV Consultation report.
"Higher public infrastructure investment and government initiatives to tackle supply-side bottlenecks and repair corporate and public bank balance sheets should also help crowd-in private investment."
The IMF expects near-term headline consumer price inflation dynamics to remain supported by supply-side factors and help the Reserve Bank of India to achieve the inflation goal of around 5 percent for March 2017.
"Monetary conditions remain consistent with achieving the inflation target of 5 percent by March 2017," the IMF report said.
"Despite the recent export slowdown, continued low global oil prices should help contain the current account deficit at around 1.5 percent of GDP in FY2016/17. The FY2015/16 Union budget deficit target of 3.9 percent of GDP (equivalent to about 4.25 percent of GDP in IMF terms) will likely be achieved."
That said, economic risks remain tilted to the downside, the IMF noted.
The impact from intensified global financial market volatility could be disruptive, including from unexpected developments in the course of U.S. monetary policy normalization or China's growth slowdown, the lender said.
Barring any global volatility, slower growth in China would have only modest adverse spillovers to India, given weak trade linkages, the report said.
Meanwhile, further structural reforms could lead to stronger growth, as would a sustained period of low global energy prices, the IMF added.
In the event of a surge in global financial market volatility, the IMF Directors assessed that the exchange rate flexibility remains a key shock absorber, complemented by judicious foreign exchange intervention.
They also urged the monetary authorities to stand ready to tighten the stance if warranted, given the upside risks to inflation and still high household inflation expectations.
For comments and feedback: editorial@rttnews.com