Easing Inflation 'Heartening Development', But Road Ahead Is Arduous, Says RBI
Easing of inflation is the most heartening development in the economy in recent times, the RBI said in its monthly bulletin.
Easing of inflation is the most heartening development in the economy in recent times, even as economic activity remains resilient and global growth prospects turn gloomier, according to the Reserve Bank of India.
The most heartening development in recent times has been the easing of inflation in July 2022 by 30 basis points from June 2022, and an appreciable 60 basis points from the average of 7.3% for Q1 FY23, the central bank said in its monthly bulletin for August 2022, published on Thursday.
"This has validated our hypothesis that inflation peaked in April 2022."
For the rest of the year, "the RBI’s projections scent a steady easing of the momentum of price changes", the bulletin said.
"With the trajectory of outcomes largely in line with projections, we expect momentum to ease from 3% in Q1 to 1.7% in Q2 and further to 1.3% in Q3 and turn mildly negative in Q4 before picking up modestly and on seasonal food price effects to 2.2% in Q1 FY24. Fortuitously, base effects are favourable all through."
If these expectations hold, inflation will fall from 7% to 5% in Q1 next financial year—within the tolerance band hovering closer to the target, but not yet positioned for landing, the bulletin said. "This is a decisive point in its trajectory."
Imported inflation pressure points remain the overarching risk, followed by pending pass-through of input costs if producers regain pricing power, and wages. Yet, some risks have gone down—commodity prices, especially of crude; supply chain pressures; revving up of monsoon activity due to the depression in the Bay of Bengal, the bulletin explained.
After Q1 FY24, the task before the Monetary Policy Committee would be to guide inflation to its target of 4%. "This may prove to be more arduous than the loss of height into the tolerance band."
Apart from a fall in inflation, another heartening development is the return of capital flows to India after a hiatus, the bulletin said.
Economic Activity Resilient
Amid somewhat mixed signals being emitted by high frequency indicators, "perhaps the best word to describe the state of domestic economic activity relative to the rest of the world is resilience", the bulletin said.
The onset of the festive season should boost consumer demand, including in rural markets, also as sowing activity picks up, the bulletin said.
Robust central government capital outlays are supporting investment activity. But business investment remains tepid despite strong sales growth and increase in profits, it said.
The RBI's Domestic Activity Index, employing high frequency indicators, is showing a moderate but steady improvement in May and June, the bulletin said.
Under alternative model specifications, GDP growth for Q2 FY23 is now cast at 7.2%, supported by a favourable base, it added.
GDP growth was forecasted at 6.2% for the same quarter in the Monetary Policy Resolution earlier this month.