“The Monetary Policy Committee (MPC) notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish,” it noted.

In the monetary policy report the RBI said going forward, alternative farm support schemes and farm loan waivers announced by some state governments, higher minimum support prices and food procurement, and lower direct tax collections could put upward pressure on the combined fiscal deficit.

It also said that headline CPI inflation is expected to move up from its recent lows as the favourable base effects dissipate but is expected to remain below the target of 4 per cent.

Talking about upside risk to inflation trajectory, it said, higher crude oil prices, volatility in international financial markets, the risk of a sudden reversal in the prices of perishable food items, and fiscal slippages are some of the challenges.
Output Gap can be both positive and negative. It is positive when the actual output exceeds the full-capacity output. This happens when demand is more than supply, and factories and workers work beyond their potential to bridge the gap.
Similarly, it can be negative when the actual output is less than the full-capacity output. A negative gap indicates low demand in the economy. A positive gap can lead to inflation while a negative gap encourages disinflation.