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India's Inflation Trajectory Subject To Considerable Uncertainty: RBI Annual Report

The inflation trajectory will primarily depend on the evolving geopolitical situation, the RBI said.

<div class="paragraphs"><p>RBI Governor Shaktikanta Das at the Reserve Bank of India headquarters in Mumbai. (Photo: Reserve Bank of India/Twitter)</p></div>
RBI Governor Shaktikanta Das at the Reserve Bank of India headquarters in Mumbai. (Photo: Reserve Bank of India/Twitter)

The inflation trajectory is subject to considerable uncertainty and will primarily depend on the evolving geopolitical situation, according to the Reserve Bank of India.

Sharp movements in global commodity prices are having a significant bearing on food inflation dynamics in India, the RBI said in its annual report for 2021-22.

Though record foodgrain production and forecast of a normal southwest monsoon augurs well for food inflation, heightened uncertainty around global food prices arising from geopolitical risks might offset these positive domestic impulses, especially via elevated prices of wheat, edible oil, feed costs and key agriculture inputs such as fertilisers, it said.

Volatility in the prices of international crude oil and key raw materials and intermediates, together with global supply-chain disruptions, may push up input cost pressures.

In particular, a scenario in which crude persists above $100 a barrel poses a major upside risk in terms of reigniting second-round effects across manufacturing and services prices, the RBI said.

With risks to the near-term inflation outlook rapidly materialising, the Monetary Policy Committee had raised the benchmark repo rate by 40 basis points in an off-cycle meeting early this month.

The RBI, in its annual report, also suggested various supply-side interventions, along with those the government has enforced.

These include removing customs duty on import of raw cotton, reducing road and infrastructure cess on petrol by Rs 8 a litre and diesel by Rs 6 a litre, removing customs duty and agriculture infrastructure and development cess on import of 20 lakh tonnes of crude sunflower oil and crude soybean oil per financial year till March 31, 2024.

Elevated crude oil prices can widen the current account deficit, while foreign portfolio investors may remain risk averse towards emerging market economies, including India, the report said. Still, robust reserve buffers, a strong FDI pipeline and proactive policy measures toward supporting merchandise exports and participation in global value chains should help the economy withstand adverse global spillovers.

A faster resolution of the geopolitical conflict and no severe Covid-19 waves could subdue and even reverse these pressures and help contain core inflation, the RBI said.

Other Key Pointers 

  • The prospects for agriculture and allied activities are brightening at this juncture on the prediction of a normal monsoon, with terms of trade gains anticipated from exports.

  • Raising farm productivity, however, remains a key concern. It should be driven by agricultural research and development, next-generation technological advancements and an atmosphere of innovation and entrepreneurship for agri-tech startups to thrive.

  • Early indicators point to revival of economic activity across other sectors that needs to be assiduously nurtured to boost consumer and business confidence and private investment.

  • Capacity utilisation in several industries is moving closer to normal levels, although rising input costs and persisting supply bottlenecks, as for instance in semiconductors for the automobile sector, may impede or delay a fuller recovery.

  • Contact-intensive sectors are expected to rebound over the year ahead, with positive implications for the workforce and for consumption demand. The thrust given to infrastructure and investment in the Union Budget 2022-23 will play a major role in shaping the post-Covid-19 recovery.

  • Longer-than-expected supply-chain bottlenecks, elevated freight rates and upsurge in global inflation amid escalating geopolitical tensions pose significant risks.