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With oil prices moving up significantly since the February 2016 lows of below $30 per barrel, the RBI on Tuesday cautioned that there is a need to be alert to the risks of commodity price cycle reversals and the economy’s preparedness to readjust. In its Financial Stability Report, the RBI said: “As of now India’s external position looks robust with forex reserves at historic highs and low trade deficit, helped mainly by lower crude prices.
“However, the downside of prolonged low oil prices also needs to be reckoned in terms of likely reduction in private transfers and remittances. Hence, there may not be any room for complacency in the current global scenario.”
The central bank observed that the sharp decline in international crude oil prices since Q3 (October-December period) of 2014-15 has provided terms of trade benefits leading to relatively lower imports and reduced external vulnerabilities.
According to the IMF, the terms of trade benefits are estimated to be the highest for India among all G-20 countries in the recent period.
On the other hand, according to the International Energy Agency (IEA), India is the third-largest consumer of oil and surpassed China as its main growth market.
Risks from rural distress Given the fact that any distress in the farm sector has a significantly higher impact on the political economy, the RBI said continuous thrust on a coherent policy which addresses overall rural distress assumes significance even as the government’s efforts are aimed at doubling farm incomes by 2022.
India stands out India at this juncture stands out amongst the emerging markets cohort in terms of growth, the report said.
However, gross fixed capital formation needs to be bolstered while maintaining robust trends in consumption to sustain higher levels of growth.
The RBI said the issue of slow investment recovery needs to be seen in the context of desired de-leveraging of corporates and balance sheet repairs in the banking industry.
While capacity utilisation has shown some improvements, trends in the Index of Industrial Production (IIP) and the Purchasing Managers’ Index (PMI) indicate that manufacturing activity needs to pick up further.
The gross savings rate has declined, reflecting moderation in household savings
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