New Delhi: RBI said the timely implementation of GST which has to kick-in by April 2017 will be "challenging" but the indirect tax reform will be strengthening government finances over the medium-term, boost business sentiment and eventually investments.
"The current accommodative stance of monetary policy and comfortable liquidity conditions should also provide a congenial environment for the reinvigoration of aggregate demand conditions," it said.
Rajan said the successive downgrades in the global growth projections by multilateral agencies and world trade sluggishness is pointing to a further slackening in the external demand going forward.
On inflation, he reiterated that RBI will look through the statistical effect of house rent allowance increase because of the Seventh Pay Panel implementation, but its impact on inflation expectations will have to be "carefully monitored".
Inflation rose to 5.8 per cent in June and is widely expected to rise further in July before cooling-off once the food prices climb down on the good monsoons. Inflation measured by wholesale prices rose for the fifth consecutive month to 1.68 per cent for June.
The RBI, which has now become an 'inflation-targeting' central bank, wants to get the headline inflation number down to 5 per cent by March 2017. The liquidity is comfortable in the system, following the moves announced by Rajan at the first bi-monthly monetary policy in review on this front.
Rajan on August 9 said RBI has been front-loading liquidity provision through its open market operations and spot interventions or deliveries of forward purchases, in wake of the expected pressure in the FCNR (B) redemptions expected in September.
He added that the RBI will continue to work to ensure that there are no market disruptions because of the redemptions through domestic liquidity operations and forex interventions. The factory output has been showing signs of weakness, but the pressure on inflation front made expectations of a growth-propping rate cut difficult.
Interestingly, Rajan has reiterated the "accommodative" monetary policy stance every time he maintained status quo on rates after January 2015, when he announced the first of the four rate cuts totalling 125 basis points.
