The Reserve Bank of India (RBI), in its monthly economic bulletin, has said the slack in growth speed observed in the second quarter of 2024-25 in India is "behind us" as private consumption is back to being the driver of domestic demand with festival spending lighting up real activity in Q3.
"Domestic financial markets are seeing corrections with relentless hardening of the US dollar and equities being under pressure from persistent portfolio outflows. The medium-term outlook remains bullish as the innate strength of the macro-fundamentals reasserts itself. Headline consumer price index (CPI) inflation rose above the upper tolerance band in October 2024 with a sharp surge in the momentum of food prices along with an increase in core inflation," the central bank says in its 201-page report.
The RBI article on the State of the Economy, penned by several officials including Deputy Governor Michael Debabrata Patra, said the October CPI inflation reading turned out to be a "sticker shock" after the wake-up call of September’s spike, reinforcing the RBI’s warnings on complacency due to sub-target outcomes for July and August.
"What is worrying is that apart from the sharp surge in the momentum of food prices, core inflation has edged up," the economists write.
The RBI economists find that there are early signs of second-order effects or spill overs of high primary food prices -- following the surge in prices of edible oils, inflation in respect of processed food prices is starting to see an uptick. "The pick-up in price rises of household services like those of domestic helps or cooks also reflects higher cost of living pressures due to elevated food prices beginning to transmit to these specific wages."
The economists added that inflation is already "biting into urban consumption demand and corporates’ earnings and capex. "If allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports."
India's retail inflation in October 2024 worryingly soared to a 14-month high of 6.2% in October 2024, breaching the upper limit of the MPC's medium-term target range of 2-6%. The corresponding inflation rates for rural and urban are 6.68% and 5.62%, respectively. The sequential hardening in inflation was largely led by the food and beverages segment, followed by a mild uptick in the core items. The retail inflation had hit 9-month high of 5.49% in September 2024, a huge spike from 3.65% in August, 3.60% in July and 5.08% in June.
Overall, the Indian economy is "exhibiting resilience," underpinned by festival-related consumption and a recovering agriculture sector, the RBI has said. "Record production estimates for kharif foodgrains as well as promising rabi crop prospects augur well for farm income and rural demand, going forward," it says.
On the industrial front, the RBI economists think, manufacturing and construction are expected to sustain dynamism. "EV adoption, favourable policies, subsidies, and growing infrastructure are positioning India as a leader in sustainable transportation and fostering job creation in emerging clean energy sectors."
It says India’s services sector is expected to "sustain" its growth momentum, robust job creation, and high consumer and business confidence.
On the global growth, the RBI experts write that it is expected to sustain its momentum in the near-term as declining inflation and easing of financial conditions across major economies boosts consumer spending. "Labour market conditions remain supportive with a decline in job vacancy rates and low unemployment rates. The global trade outlook is positive, although fears of protectionist trade policies loom over the nascent resilience."
Despite a significant fall in inflation, they say, consumer confidence in most economies is yet to recover, which could act as a drag going forward.
