“Inflation is already biting into urban consumption demand and corporates’ earnings and capex,” said the central bank researchers, led by deputy governor Michael D Patra. “If allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports.”
They said that the RBI remained consistent with the mandate of “price stability while keeping in mind the objective of growth.” The underlying mandate of maintaining financial stability was also paramount for Mint Road policymakers, said the report.
India’s headline inflation, measured by the consumer price index (CPI), rose to a 14-month high of 6.21% in October, up from 5.49% in September. Following this, expectations of an immediate policy rate cut have receded even as Finance Minister Nirmala Sitharaman said she favoured interest rates to be “far more affordable.”
There are some early signs of second-order effects or spillovers of high primary food prices. For instance, after a surge in the prices of cooking oils, inflation in respect of processed foods is starting to see an uptick.
Therefore, even as space for monetary easing has opened up in the advanced economies, emerging market central banks face challenges from external headwinds, leading to differences in policy responses, the RBI researchers said.
The state of economy report, however, projected a bullish outlook for the medium-term backed by the strong macro-fundamentals, despite the record dollar outflows from Indian markets forcing the rupee to depreciate to a new low and deplete forex reserves by nearly $30 billion in six weeks.
“The Indian economy is exhibiting resilience, underpinned by festival-related consumption, and a recovering agriculture sector,” said the central bank researchers.
Record production estimates for summer-sown kharif foodgrains and promising winter-sown rabi crop prospects would augur well for future farm income and rural demand.
“The slack in speed observed in the second quarter of 2024-25 is behind us as private consumption is back to being the driver of domestic demand with festival spending lighting up real activity in Q3,” they observed.
The RBI maintains that the views expressed in the report are of the authors and do not necessarily represent the opinion of the central bank.
Domestic financial markets are seeing corrections with relentless hardening of the US dollar and equities being under pressure from persistent portfolio outflows. The rupee, however, held its ground and depreciated by a mere 0.3% in October and was the least volatile among the Asian peers, the RBI economists said.
Despite pressures in the bond and equity markets from global uncertainty and fluctuating foreign portfolio investments, financial conditions are likely to remain accommodative as reflected in corporate bond issuances and FDI inflows, the report noted.
The equity market correction was an outcome of cumulative net outflows of around Rs 1.2 lakh crore by FPIs from equities from late September until November 14, 2024 – the highest ever in absolute terms. However, RBI researchers pointed out that on a relative basis, when FPI outflows are measured in relation to total market capitalisation, this episode of outflows remains modest so far in comparison with the sell-offs in previous episodes.
