Growth may sustain but inflation not likely to ease, becoming structural.
India’s economic growth momentum is likely to sustain but high inflation, on the back of rising global commodity prices, will be a concern, said the Reserve Bank of India (RBI) on Thursday.
India’s Gross Domestic Product (GDP) grew at 8.9 per cent in July-September, up from 8.7 per cent a year earlier and 8.8 per cent in the quarter before. However, food price inflation jumped to 14.44 per cent in the week to December 18 from 12.13 per cent a week before. Inflation based on the Wholesale Price Index eased to 7.48 per cent in November from 8.58 per cent in the previous month, mainly due to a high base.
“Buoyed by strong domestic demand, GDP growth rates have rebounded after some moderation in the aftermath of the global financial crisis. Going forward, the growth momentum is expected to be sustained by increased corporate capital expenditure, infrastructure investments and strong consumption demand,” the central bank said in its Financial Stability Report on Thursday.
However, the report warned of downside risks to growth from global economic imbalances and the prospect of global recovery faltering.
RBI said food inflation was becoming structural. “Inflation, particularly food inflation, in India continues to rule at elevated levels, reflecting in part the structural demand-supply mismatches resulting from rising incomes and changing consumption patterns,” RBI said.
According to the central bank, the recent upswing in food and commodity prices at the global level is also a concern for domestic inflation.
In India, constraints in availability of infrastructure and the widening gap between savings and investment rates could also pose risks to growth, it said.
Liquidity
The present liquidity tightness, which has hardened short-term rates, warrants caution, RBI said. “Liquidity conditions remain tight. Strains continued to prevail on account of rising large government cash balances, accentuated by rising currency in circulation and faster growth of advances compared to deposits.”
Due to the present tightness, banks have been borrowing more than Rs 1 lakh crore daily, on average, since early November from the repo window of RBI.
“While the tight liquidity conditions have aided the transmission of monetary policy, excessive deficits induce unpredictability in both availability and cost of funds, making it difficult for the banking system to sustain credit delivery. The liquidity situation will require watchful management in the coming months,” RBI said.
Despite several steps by the central bank in recent times, such as reducing banks’ Statutory Liquidity Ratio and infusing money via open market purchases of government bonds, the liquidity deficit continued to be much above the ‘comfort zone’ of RBI, which is around Rs 50,000 crore.
