The Reserve Bank on Friday sounded dovish over falling prices and rising GDP, but maintained that its fight over persistent inflation remains unfinished. While confirming that the inflation ‘elephant’ was returning back to the forest (read, easing inflation), RBI governor Shaktikanta Das delivered both good and bad news.
Even if the quarter-wise inflation estimates were revised lower, the central bank pegged the headline inflation for 2024-25 at 4.5 percent—0.5 percentage point above the annual target. What’s upsetting is that just one quarter, Q2, is expected to see inflation printing below the target at 3.8 percent, while the remaining three quarters will likely see higher prints. Unlike price rise that happens fast and in a straight line, disinflation, as we are seeing now, is rather slow and not diagonal. This perhaps explains why the RBI is being extra careful in maintaining status quo not just on rates, but also on its policy stance.
One of the key factors interrupting the inflation outlook is food prices, which remained volatile through the second half of 2023-24. If the last mile of disinflation turns out to be protracted, as the RBI noted, interest rates may remain higher for longer, which in turn could upset growth. If erratic rainfall and deficient soil moisture hindered the rabi crop sowing, water reservoir levels and other climatic factors are now imparting uncertainty to the food price outlook.
Much like rainfall, summer temperatures are posing challenges for monetary policy with the national weather office predicting above-normal temperatures and heat waves. Such a prospect imparts an upside risk to food inflation and could raise headline inflation by about 1 percentage point over the baseline. Hence, the government should load up on buffer stocks to ease the anticipated inflationary pressures.
As for growth, buoyed by domestic demand, India remains the fastest growing major economy and is well on its way to clock 7 percent for the third consecutive year. Though the 2023-24 growth is pegged at 7.6 percent, it is not broad-based, as the two main engines of consumption and investment are not running full-steam.
However, for the future, the government’s capex push, upbeat business and consumer sentiments, and strong corporate and bank balance sheets should come in handy. That said, global oil prices, other external factors, rising trade distortions and geo-economic fragmentation could weigh on trade and growth.