India better placed than most to face turmoil, says RBI report

'Core inflation defies softening of input costs'

The Indian economy has remained resilient amidst high tides of uncertainty and is better positioned than many parts of the world to head into a challenging year ahead, the Reserve Bank of India (RBI) said in its State of the Economy report on Tuesday. “Even as global growth is set to slow down or even enter a recession in 2023…India has emerged from the pandemic years stronger than initially thought,” it said.

The report said a direct impact of the US banking crisis on India’s economic activity could be limited, but markets were bracing for tighter financial conditions. “This could present a trade-off between financial stability concerns and the conduct of disinflationary monetary policy.”

The report, however, raised inflation concerns. While the consumer price index (CPI)-based inflation softened marginally in February, it remained elevated, the report noted, adding that core inflation “continues to defy the distinct softening of input costs”.

The report also red-flagged a slowdown in private consumption. “Private consumption may edge down further, going by high-frequency indicators, including and perhaps mainly due to elevated inflation,” it said.

Retail inflation in February moderated to 6.44 per cent year-on-year, from 6.52 per cent in January. The moderation in headline inflation by 8 basis points (bps) between January and February was driven by a favourable base effect. Core inflation softened to 6.1 per cent in February from 6.2 per cent in the previous month.

CPI inflation has stayed above the RBI’s upper tolerance level of 6 per cent for nine of the 11 months in the current financial year, despite a 250-bp hike in the repo rate between since May 2022.

The RBI’s Monetary Policy Committee will review and announce its policy on April 6.

“Over the financial year ahead (2023- 24), inflation is expected to range tightly between 5.0 and 5.6 per cent if India survives an El Nino event adversely affecting the south west monsoon, given global uncertainties,” the report said.

On the growth front, the central bank has sounded more sanguine even if GDP growth slowed to 4.4 per cent for the October-December period. The report attributed the slowdown in Q3 to “unfavourable” base effects.

The report said the Q3 data offered “valuable information content” for the rest of the year. In particular, it pointed out further slowdown in private consumption.

The RBI’s nowcast model projects real GDP growth for the fourth quarter of FY23 at 5.3 per cent.

The report noted that growth impulses were getting further strengthened by easing of supply chain pressures and a rebound in services activity.

“The deceleration in government final consumption expenditure counteracted the upside from the deceleration in imports. Private consumption also lost speed and so did fixed investment, although public spending on infrastructure provided a cushion. On the supply side, agriculture and services offered a silver lining against the backdrop of moderation in industry,” the report said.

Another important highlight of the report was a reversal of the investment-savings gap to the pre-pandemic levels. During the pandemic, the gap between investment and savings reversed from a gap of 0.8 per cent of GDP in 2019-20 to a surplus of 1.0 per cent in 2020-21. It has again flipped to a gap of 1.2 per cent in 2021-22.

“If this is suggesting the beginning of a new trend as indicators for 2022-23 also point, India’s growth prospects are poised to improve,” the report said.

The February monetary policy review projected real GDP growth of 6.4% for 2023-24.