Economy gaining strength, inflation to slide further in Sept: RBI report


Amid weakening global prospects, the Indian economy is gaining strength led by domestic drivers – private consumption and fixed investment, with strong public sector capital expenditure – and supply responses are improving, according to the Reserve

Bank of India’s (RBI’s) State of the Economy report released on Monday.


The report, however, flagged “a new risk to global financial stability”. Crude oil prices are hovering above $90 per barrel, challenging 10-month highs, due to Saudi Arabia and Russia extending voluntary production cuts to the end of 2023.


“The strength of the US dollar on safe haven demand is also making crude prices higher. Global inflation is once again under siege as deep deficits in global oil balances become persistent unless global demand is hit by a sharp economic downturn,” the article authored by a team led by RBI Deputy Governor Michael Debabrata Patra said. “Dispelling this global gloom, the Indian economy is picking up steam and strength.”

India’s retail inflation, which softened in August from the previous month’s peak, is expected to trend down further in September, it said. “As in the case of the upswing, the ebbing was driven by a reversal in the prices of vegetables. Hearteningly, the correction is not complete,” it added.

Headline inflation, as measured by year-on-year (Y-o-Y) changes in the Consumer Price Index (CPI), moderated to 6.8 per cent in August from 7.4 per cent in July. This, however, was still outside the RBI’s comfort band of 2-6 per cent. Food inflation fell to 9.2 per cent Y-o-Y in August from 10.6 per cent in July. In terms of sub-groups, inflation in vegetables softened sharply, though it remained elevated. There are early indications of correction in a broad range of vegetable prices.

Turning to the economic growth trend, the RBI report said: “India’s G20 Presidency and its outcomes with the ethos of Vasudhaiva Kutumbakam as the vision of global progress assume significance in an environment where global economic activity is experiencing a loss of momentum with a dichotomy in macroeconomic conditions across regions.”

Real gross domestic product (GDP) growth for the first quarter of 2023-24 came in at 7.8 per cent, matching an assessment presented in the August edition of the report. This was led by domestic drivers – private consumption and fixed investment – which offset “the negative spill from net exports”.

In the second quarter, available indicators point to a gain in quarter-on-quarter (q-o-q) momentum on the back of domestic demand. Clothing and lifestyle retailers and shopping malls are experiencing a sharp recovery in sales across price points in the past few weeks. This has raised hopes of a pick-up in demand through the rest of the festival season that began with Raksha Bandhan and Onam, and cheers for discretionary retail spending.

On watch are electronics and automobiles, which may be the next segments to attract festival spend. There are also indications that rural demand for fast-moving consumer goods (FMCG) has swung back into positive territory after being under pressure for over a year.

A key lead indicator will be how inflation evolves, with expectations of a sharp decline in September, on top of the August ebbing, fanning optimism. Looking ahead, India’s consumer market is expected to become the world’s third largest by 2027, with household per capita spending outpacing all other developing economies in Asia, it said.

On the investment side, capex by large central public sector enterprises (CPSEs) was strong at above 42 per cent of the annual target. This was in keeping pace with the emphasis on capital spending by the central government. Highways, the petroleum sector and railways were leading the surge in CPSE capex in the first five months of 2023-24.

States have also boosted their capital outlays by close to 50 per cent YoY. On the other hand, the private corporate sector is reported to be continuing to go slow on capex, although sectoral improvements are also being reported, based on projects sanctioned by banks/financial institutions, the report said.

‘Central’ view

> Vegetable prices have started to correct downwards

> Private consumption, fixed investment are offsetting weak exports

> Rural demand for FMCG has swung back into positive territory

> States have boosted their capital outlays by close to 50% year-on-yeaR


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