Economic Activity In India Poised To Expand, Inflation To Ease: RBI
Economic activity in India is poised to expand further led by contact-intensive sectors and festive demand.
Broader economic activity in India has remained resilient and is poised to expand further with demand accelerating as contact-intensive sectors experience a bounce back and inflation is expected to ease, the Reserve Bank of India said.
The momentum of real GDP growth is expected to shed the drag embedded in the government estimates for the first quarter of FY23 and move into positive territory in the remaining quarters, including on a seasonally adjusted basis, the RBI said in its monthly bulletin for October 2022.
Although this may not be evident in year-on-year growth rates due to unfavourable base effects, quarter-on-quarter annualised rates will reflect the underlying recovery, it said.
Contact-intensive sectors will likely lead the rejuvenation as the restraint due to the pandemic wanes, according to the central bank.
Festival-related spending is already boosting consumption demand with positive externalities for other components of domestic demand, it said.
The RBI's economic activity index with 27 high frequency indicators now casts GDP growth for Q2 FY23 at 6.4%.
While the persistence of headline CPI inflation above the tolerance band for three consecutive quarters (up to September) will trigger mandated accountability processes, monetary policy remains focused on realigning inflation with the target, the RBI said.
This may involve two milestones–first, bringing it within the tolerance band and second, lowering to around its mid-point, it explained.
"This trajectory will likely be gradual in view of the repeated shocks to which inflation has been subjected by both epidemiological and geopolitical causes, but the easing of inflation will inject confidence into both consumers and businesses, recharge animal spirits and investment and improve the international competitiveness of India’s exports."
Key Highlights
Several high-frequency indicators remain upbeat. The withdrawal of the south-west monsoon has aided travel, hospitality and construction sectors. Electricity generation picked up in September.
The late revival of the south-west monsoon augurs well for the Rabi season. The surplus rainfall during July-September led to congenial soil moisture levels and reservoir storage conditions. The availability of all major fertiliser groups and seed categories is in surplus, further brightening Rabi prospects.
High-frequency data for the second quarter reflect sustained demand conditions supporting corporate sector performance.
Headline inflation is set to ease from its September high, albeit stubbornly, on the back of easing momentum and favourable base effects. These positive developments are likely to be driven by the food and beverages (sector), which has undergone repeated shocks in the first half of the year.
Easing in international price pressures embodied in commodity and supply chain pressures are also likely to contribute to the softening of costs and prices.
The fight against inflation will be dogged and prolonged, given the long and variable lags with which monetary policy operates, and fraught with uncertainties.
Yet, if successful, it will entrench India’s prospects as one of the fastest growing economies of the world, enjoying a negative inflation differential with the rest of the world. "This happy outcome will re-enthuse foreign investors, stabilise markets and secure financial stability on an enduring basis."