The monetary policy committee (MPC) of the Reserve Bank of India (RBI), announced its last monetary policy resolution (MPR) of the calendar year 2023 on December 08, 2023 and resorted to maintain a status quo by keeping the policy repo rate unchanged at 6.50 per cent for the fifth consecutive time.
– By Chinmay Joshi
Amidst the prospects of global growth slowdown, the International Monetary Fund (IMF) in its recently concluded Article IV consultations with India, exuded confidence in the Indian economy and projected a strong and robust economic growth in the near-term. This has been corroborated in the recently released growth figures of Q2 for 2023-24 by MOSPI, GoI which revealed that the 7.6 per cent headline growth has been achieved because of growth in government led consumption and focus on investment generation indicated by Government Final Consumption Expenditure (GFCE) and Gross Fixed Capital Formation (GFCF) which grew by 12.35 per cent and 11.04 per cent respectively on Y-o-Y basis. However, the consumption demand from the private sector remained subdued which has been reflected in marginal increase in Private Final Consumption Expenditure (PFCE) to the tune of 3.13 per cent on Y-o-Y basis as well as declining share of PFCE in the GDP on Y-o-Y and Q-o-Q basis.
The growth from the supply side was led by the manufacturing sector by posting a growth rate of 13.9 per cent followed by construction (13.3 per cent); Electricity, Gas, Water Supply and Other Utility Services (10.1 per cent); Mining and Quarrying (10 per cent) and Services (5.8 per cent). The agriculture sector which was instrumental in driving India’s growth during Covid-19 pandemic exhibited a declining trend and grew by a meagre 1.2 per cent on Y-o-Y basis. The lacklustre performance of the agriculture sector has a potential to create demand-supply mismatches in the economy. The declining growth rate in agriculture along with the possibility of increase in the PFCE in the upcoming period as a result of rising urban and rural demand domestically will have negative implications for the inflationary situation.
Against this backdrop, the monetary policy committee (MPC) of the Reserve Bank of India (RBI), announced its last monetary policy resolution (MPR) of the calendar year 2023 on December 08, 2023 and resorted to maintain a status quo by keeping the policy repo rate unchanged at 6.50 per cent for the fifth consecutive time. The MPR observes that there has been a persistent rise in the headline inflation above the target level set out by the flexible inflation targeting (FIT) framework. Indeed, the Indian economy has been experiencing such a persistence of high inflation for the past couple of years. As per the RBI and MOSPI, GoI data, the Consumer Price Index – Combined (CPI-C) which is currently the headline inflation measurement in India, remained above the 4 per cent mandated target of FIT framework consecutively for the past 50 months. Besides, during this period, it breached the upper tolerance band of FIT i.e. 6 per cent for half of the period i.e. for 25 months accentuating that the inflation is deeply entrenched in the Indian economy.
The significant threat to headline inflation emanates from food inflation. Among the components of food inflation, the major contributing factors to the rising food price levels have been cereals and products, pulses and products and vegetables. Particularly, the prices for cereals and products remained consistently elevated in the past couple of months. As observed in the headline inflation data released by the MOSPI, GoI; since September 2022, inflation for cereals and products remained in double digits on Y-o-Y basis. In this context, several measures were announced such as export bans, stockholding limits, trade controls, imposition of export duties on Rice etc. in order to rein in the cereal inflation. Nevertheless, in the current financial year, the price levels for cereals and products remained well above 10 per cent on Y-o-Y basis contributing significantly to the overall food inflation.
Furthermore, it is also important to note that the international crude oil prices have again started to rebound and hover around US$ 80/barrel. The oil and energy price are expected to remain elevated in the near term due to tensions in the Red Sea along with other geo-political uncertainties. As per some estimates, an increase in oil prices by 10 per cent will lead to 0.35 per cent increase in global headline inflation. This is particularly significant for a country like India which is heavily dependent on the import of crude oil for its energy needs.
Additionally, the increase in the durable liquidity in the form of increase in net foreign assets (NFA) arising out of the overall balance of payments (BOP) situation will have adverse implications for the inflationary situation. Registering overall surplus in the BOP account due to higher capital inflows will lead to increase in foreign exchange (FOREX) reserves. Accumulation of FOREX reserves is indeed important for the economy in order to arrest the volatility in the foreign exchange market. However, on the other hand, the overall surplus generated in the BOP account needs to be absorbed through the injection of equivalent amounts of rupee liquidity into the economy. This injection of rupee liquidity in the economy has potential to further create inflationary pressures which requires careful monitoring. Apart from that, there is also a possibility of announcement of various populist measures in the upcoming period given the impending general elections in 2024. Such expansionary measures have a capacity to generate more aggregate demand and increase the purchasing power of the people leading to rise in the price levels in the economy.
The threat of elevated inflation still looms large over the Indian economy amidst several domestic as well as international challenges such as erratic weather conditions, food price shocks, disruptions in global energy markets, rising geo-political tensions and dwindling world trade prospects among others. In such challenging economic situations, the MPC-RBI must continue to remain vigilant, resolute and sufficiently restrictive in upcoming MPRs as threat to inflation is far from over.
(Chinmay Joshi is the Research Associate – Finance and Economics at Bhavan’s SPJIMR, Mumbai.)
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Source:financialexpress.com