Broader economic activity poised to expand further: RBI

Broader economic activity in India has remained resilient and poised to expand further even as the fight against inflation will be dogged and prolonged, according to an article in the Reserve Bank of India’s latest monthly bulletin.

“Domestic demand is accelerating, with auto sales having rebounded, real estate sales on the rise in spite of a pick-up in borrowing costs and the contact-intensive hospitality services experiencing a bounce-back,” per the article “State of the Economy”, put together by 28 RBI officials, including Deputy Governor MD Patra.

Bank credit

The authors observed that bank credit is increasing by double digits and the sustained surge in goods and service tax collections is signalling the growing formalisation of the economy.

“Indian equities are outperforming both advanced and emerging peers. Selling by foreign portfolio investors is being more than matched by domestic institutional investors’ buying,” they said.

The RBI officials underscored that corporate and bank balance sheets have become fortified through the period of the pandemic, providing further strength to the economy.

“There is a view that India is likely to be among the few emerging economies that would be left standing after the global hurricane has passed,” opined the authors.

Fight against inflation

Headline inflation is set to ease from its September high, albeit stubbornly, on the back of easing momentum and favourable base effects, the authors said.

They noted that while the persistence of headline CPI inflation above the tolerance band (of 6 per cent) for three consecutive quarters (up to September) will trigger mandated accountability processes, monetary policy remains focussed on realigning inflation with the target.

This may involve two milestones — first, bringing it within the tolerance band and second, lowering to around its mid-point.

According to the RBI officials, “This trajectory will likely be gradual in view of the repeated shocks to which inflation has been subjected by both epidemiological and geopolitical causes, but the easing of inflation will inject confidence into both consumers and businesses, recharge animal spirits and investment, and improve the international competitiveness of India’s exports.”

They emphasised that the fight against inflation will be dogged and prolonged, given the long and variable lags with which monetary policy operates and fraught with uncertainties.

“Yet, if we succeed, we will entrench India’s prospects as one of the fastest growing economies in the world, enjoying a negative inflation differential with the rest of the world.

“This happy outcome will re-enthuse foreign investors, stabilise markets and secure financial stability on an enduring basis,” the authors said.

So, is India decoupling?

“Time will tell. For now, reasonably strong macrofundamentals by comparator comparison are being tested by the twin whammies of rising international interest rates and an inexorably strengthening US dollar,” opined the officials.

They noted that this is inflicting collateral damage – imported inflation and rupee depreciation.

“Financial market notwithstanding and despite periodic revisions of forecasts by various agencies in India and abroad, the consensus seems to be that real GDP growth in India will clock 7 per cent or close to it in 2022-23,” the authors said.

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