Elevated food prices a near-term risk to RBI’s disinflation path

The glide path of consumer inflation toward the central bank’s legally mandated 4% target will become clearer as data emerges on the economy’s ability to withstand price shocks emanating from weather events or spikes in fuel costs. “In the near term, however, extreme weather events may pose a risk to inflation along with prolonged geopolitical tensions that could keep crude oil prices volatile…. While alignment with the inflation target is gradually occurring, incoming data will provide greater clarity and confidence on the disinflation path,” the authors wrote in the article published in the latest Reserve Bank of India () bulletin.

To be sure, the views expressed are those of the authors and do not necessarily represent the views of the RBI.

Consumer price index (CPI) inflation is at 4.9% in March after the recent peak of 5.7% in December. The central bank is legally mandated to maintain it at 4%, with a 2 percentage point latitude in either direction.

Few are now betting on an early start to the rate-easing cycle in India after recent central bank commentary underscored the need to win a decisive fight against inflation. India’s central bank, like its peers in the developed world, has alluded to the need to durably restrain inflation before taking a call on easing the cost of funds.

“Two years ago, around this time, the elephant in the room was inflation,” RBI Governor Shaktikanta Das had said earlier this month, after the latest monetary policy review meeting. “The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis.”

An important development that favours India’s growth ambitions is the evolution of inflation dynamics in recent prints. Starting in January 2024, the softening of headline inflation is providing a tailwind to growth impulses, the authors said.

Consumer confidence strengthened across parameters set out in the RBI’s latest survey of households. Enterprise surveys indicate that business assessment and expectations remain in positive terrain, with optimism on production, capacity utilisation, order books, employment and overall business conditions.

Economic activity remained resilient in Q4, although available data indicate some moderation in March vis-à-vis the previous month on a seasonally adjusted basis. Using the Economic Activity Index (EAI), GDP growth for Q4 24 is placed at 7.3%.

The must expand at 8-10% over the next decade to reap the demographic dividend that started accruing from 2018 and, as calculations show, will last until 2055, wrote the authors. The developmental strategy over the next few decades must centre around extracting the maximum possible contribution of its young and rising labour force to the growth of gross value added (GVA), wrote Patra and his team.

ECONOMY GOING STRONG
India’s economic activity remains resilient, backed by strong investment demand and upbeat business and consumer sentiment, RBI economists said, echoing the views of the Monetary Policy Committee (MPC).

On demand, the MPC expected private consumption to gain steam from a further pick-up in rural activity and steady urban consumption as consumer confidence improves. The economists said the panel felt that prospects for fixed investment remain brightdue to business optimism, healthy corporate and bank balance sheets, robust government capital expenditure and signs of an upturn in the private capex cycle.