 "Extreme weather conditions, crude pose inflation risk: RBI Bulletin")
Retail inflation — the main yardstick for the central bank’s policymaking — is ‘finally’ in sight of hitting the 4 per cent target, but extreme weather events, along with a spike in international crude oil prices due to geopolitical uncertainties, pose an inflation risk, the Reserve Bank of India’s (RBI’s) State of the Economy report said.
The report, authored by RBI staffers including Deputy Governor Michael Patra, says that the country must grow by 8-10 per cent for the next three decades to reap the advantage of demographic dividends, which will last until 2055.
It has been clarified that the views expressed in the report are those of the authors and do not represent the views of the RBI.
After failing in its mandate to maintain Consumer Price Index (CPI)-based inflation in the 4-6 per cent range for three successive quarters in 2022, the Indian central bank is refusing to drop its guard on price rise even though the repo rate has not been hiked since April 2023.
Observing that the softening of headline CPI inflation since January is providing tailwinds to growth impulses, inflation has gravitated towards 4.9 per cent in March after averaging 5.1 per cent in the preceding two months following the recent peak at 5.7 per cent in December 2023.
“This trajectory was along anticipated lines, with fourth quarter of 2023-24 inflation outcome of 5 per cent in alignment with projections,” the report said.
RBI has projected headline inflation for the current financial year (2024-25) at 4.5 per cent.
Also Read
“With 4 per cent inflation finally being sighted, there is greater confidence now that the descent of inflation to the target is imminent,” the report said.
The report noted that with alignment with the inflation target gradually occurring, incoming data will provide greater clarity and confidence on the disinflation path.
The report reiterated concerns over food inflation, which, despite some signs of moderation, remains elevated and a potential source of risk to the disinflation trajectory.
“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,” the report said.
Brent crude prices hit $90 per barrel earlier this month following a rise in geopolitical conflicts in West Asia before cooling down marginally.
The report said careful monitoring during the summer is warranted as overlapping food price shocks play out, before an above-normal southwest monsoon this year, as projected by the India Meteorological Department (IMD), enabling an easing of food price pressures.
A World Meteorological Organization report recently said, “Data from IMD reflects a worrying escalation in extreme weather events necessitating an urgent and collective response.”
Regarding economic growth, the report said conditions in India are shaping up for an extension of the trend upshift that took the average real gross domestic product growth above 8 per cent during 2021-24.
“To achieve its developmental aspirations over the next three decades, the Indian economy must grow at a rate of 8-10 per cent per annum over the next decade to reap the demographic dividend that started accruing from 2018 and, as calculations show, will last until 2055,” it said.
The report further said a resurgence of private investment has become visible and that the conditions are appropriate, with the credit quality of Indian corporates having strengthened on the back of deleveraged balance sheets, sustained domestic demand, and public capital expenditure, and rating upgrades have continued to surpass downgrades.
“For India to harness its favourable demographics and achieve the escape velocity required to breach the low middle-income barrier, 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,” the report said.
The report identified raising employability, with a focus on the formalisation of employment opportunities for youth and women, as continuing to be the hallmark of the strategy.
The report said while labour quality has grown slowly in past years, at the rate of 0.7 per cent per annum between 1980 and 2021, there is growing evidence that the growth rate of aggregate labour quality has improved since 2017-18.
“The services sector has been driving this improvement, although labour quality in the manufacturing sector has maintained growth after moderating from a spike in 2019-20,” it said.