Kolkata: Indian economy is facing a downside risk with the imposition of stiff tariff, even as the country's financial conditions remained supportive of domestic economic activity, the Reserve Bank of India said in the August state of economy report.
"Persisting uncertainties related to India-US trade policies continue to pose downside risk," the central bank economic researchers said, while they expected the local factors to push demand and economic activity.
"An increase in real rural wages may support rural demand in the second half of the financial year. Coupled with the benign financial conditions, ongoing transmission of rate cuts, supportive fiscal measures and rising household optimism, the environment is conducive for holding up aggregate demand," they said.
They also expected the average headline inflation to remain significantly below the target and to support the growth dynamics.
The monthly bulletin is issued by the central bank's Department of Economic and Policy Research and under the guidance of deputy governor Ponnam Gupta. RBI maintains that the views expressed in the monthly economic report were of the researchers.
"Continuing uncertainty on US trade policies shaped the global macroeconomic environment during July and August. Domestic economic activity remained mixed across sectors in July," the report said.
The European Union, South Korea and Japan have entered into trade deals with the US, while steeper tariffs were levied on Brazil, Canada, India and Switzerland in August. The US levied a total 50% tariff on most Indians goods, baring a few exceptions. While 25% of the tariff came into effect on August 7, the other half became effective Wednesday. About 13% of India's total merchandise exports will be directly impacted by the elevated 50% US tariff.
The foreign portfolio investors withdrew investments from local equities in July and August, reversing two consecutive months of inflows, as they wanted a safer haven for following heightened risk-off sentiment amid trade negotiations.
However, steady inflows from domestic institutional investors, notably mutual funds, after India’s sovereign credit rating upgrade and the announcement of GST reforms, helped cushion the impact from net selling by foreign portfolio investors, the RBI paper observed.
India's industrial activity remained subdued even as the manufacturing sector expanded, along with the services sector sustaining the growth momentum. Headline inflation, which fell for the ninth consecutive month in July, is likely to soften further below 4% in the second quarter.
"The monetary policy would continue to maintain a close vigil on the incoming data and the evolving domestic growth-inflation dynamics to chart out the appropriate monetary policy path," the report said.
"Persisting uncertainties related to India-US trade policies continue to pose downside risk," the central bank economic researchers said, while they expected the local factors to push demand and economic activity.
"An increase in real rural wages may support rural demand in the second half of the financial year. Coupled with the benign financial conditions, ongoing transmission of rate cuts, supportive fiscal measures and rising household optimism, the environment is conducive for holding up aggregate demand," they said.
They also expected the average headline inflation to remain significantly below the target and to support the growth dynamics.
The monthly bulletin is issued by the central bank's Department of Economic and Policy Research and under the guidance of deputy governor Ponnam Gupta. RBI maintains that the views expressed in the monthly economic report were of the researchers.
"Continuing uncertainty on US trade policies shaped the global macroeconomic environment during July and August. Domestic economic activity remained mixed across sectors in July," the report said.
The European Union, South Korea and Japan have entered into trade deals with the US, while steeper tariffs were levied on Brazil, Canada, India and Switzerland in August. The US levied a total 50% tariff on most Indians goods, baring a few exceptions. While 25% of the tariff came into effect on August 7, the other half became effective Wednesday. About 13% of India's total merchandise exports will be directly impacted by the elevated 50% US tariff.
The foreign portfolio investors withdrew investments from local equities in July and August, reversing two consecutive months of inflows, as they wanted a safer haven for following heightened risk-off sentiment amid trade negotiations.
However, steady inflows from domestic institutional investors, notably mutual funds, after India’s sovereign credit rating upgrade and the announcement of GST reforms, helped cushion the impact from net selling by foreign portfolio investors, the RBI paper observed.
India's industrial activity remained subdued even as the manufacturing sector expanded, along with the services sector sustaining the growth momentum. Headline inflation, which fell for the ninth consecutive month in July, is likely to soften further below 4% in the second quarter.
"The monetary policy would continue to maintain a close vigil on the incoming data and the evolving domestic growth-inflation dynamics to chart out the appropriate monetary policy path," the report said.
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