 "Inflation")
Rising food prices pose the sole threat to the Reserve Bank of India’s (RBI’s) commitment to align headline inflation with the 4 per cent target, according to the central bank’s ‘State of the Economy’ report.
The report said the central bank was preparing for an anticipated uptick in inflation readings for November and December.
The firming up of several constituent prices has the potential to disrupt the progress achieved in the past two months, it further said.
“Clearly, the only risk to the RBI’s resolve to align headline inflation with the target of 4 per cent is food inflation. Several constituent prices are already firming up -- onions; tomatoes; cereals; pulses; and sugar -- with the potential to disrupt the gains made in the last two months. Accordingly, in the RBI, we are bracing up for upticks in the readings for November and December,” the report said.
India’s consumer price index (CPI) inflation rate fell to 4.87 per cent in October, marking the lowest figure since June, compared to the 5.02 per cent reported in September. Despite this overall decline, the food price index exhibited a sequential increase in October, breaking a two-month downward trend. Notably, within the food category, the vegetable price index saw a rise of 3.4 per cent month-on-month, primarily driven by a 15.5 per cent sequential surge in onion prices.
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Food items’ weighting is approximately 40 per cent in the CPI basket. Vegetables, constituting 13.2 per cent of the CPI-food and beverages basket, have historically played a significant role in driving food inflation. They have been major drivers of both price increases and subsequent moderation in food prices.
The headline inflation rate had risen to a 15-month high of 7.44 per cent in July due to a surge in retail prices of vegetables, particularly tomatoes.
According to the report, disinflationary monetary policy is working its way through the economy, steadily mitigating underlying inflationary pressures. The report highlighted the consumer inflation rate fell to its lowest level in three months. Notably, the core inflation rate fell by close to 200 basis points to a 43-month low from its recent peak in January 2023.
Despite these strides, the report emphasised that “we are not out of the woods yet and have miles to go”.
“Disinflationary monetary policy is working its way through the economy, steadily excoriating underlying inflationary pressures,” the report said.
Meanwhile, the report said a prevailing consensus, substantiated by current estimates, indicated real GDP growth was poised to surpass the central bank’s projected rate of 6.5 per cent for the second quarter. This optimistic outlook finds validation in the robust and widespread bottom line growth evident in corporate results for the second quarter, the report said.
Notably, sectors like oil and gas, automobiles, and construction have shown substantial increases in profitability.
“In India, the momentum of the change in GDP is sequentially expected to be higher in Q3:2023-24, with festival demand remaining ebullient,” the report said.
On the global front, the report said a slow but steady disinflationary trend was unfolding despite headline inflation persisting above target levels in many economies, highlighting that CPI inflation in the US eased to 3.2 per cent year-on-year in October, down from 3.7 per cent in September. Additionally, the headline personal consumption expenditure (PCE) inflation rate maintained its stability for the third consecutive month at 3.4 per cent year-on-year in September, while the core PCE inflation rate showed a marginal moderation to 3.7 per cent.
“A very gradual disinflation is underway even though headline inflation is still above the target in most economies,” the report said.
The report highlighted an escalation in global risks due to the emergence of a new conflict in West Asia, alongside the ongoing Russia-Ukraine war. This has contributed to heightened concerns about both global growth and commodity prices.
According to the report, currently, the geopolitical risk index has reached its highest point in 14 months. In contrast, the global supply chain pressures index (GSCPI) showed moderation, reaching -1.7 in October 2023.
“Consumer sentiments worsened, especially in the US and the euro area in October, amidst multiple sources of uncertainty,” the report said.
The report authored by RBI staffers including deputy governor M.D, Patra, does not represent the views of the central bank.
The report authored by RBI staffers including deputy governor M.D, Patra, does not represent the views of the central bank.
