Monthly Economic Review (MER) by Finance Ministry apprehends inflation may see a resurgence in 2023 on account of supply disruptions due to geopolitical conflict. Rising dollar is also expected to fuel this concern. Still, the review says, growth and stability concerns for India are less than that of the world at large.
“Global energy prices and supplies remain sources of concern. Geopolitical conflicts may yet intensify reigniting supply chain pressures that have eased recently. If so, inflation may yet see a resurgence rather than a decline in 2023,” MER made public on Saturday, said.
Retail inflation based on Consumer Price Index (CPI) surged to 7.4 per cent in September mainly on account of higher vegetable prices. This is ninth successive month the rate stays above the upper band of targeted inflation (2-6 per cent with median rate of 4 per cent). At the same time, wholesale inflation, based on Wholesale Price Index (WPI) dropped to 18-month low of 10.7 per cent, but still in double digit.
Crude oil and Dollar
According to MER, going forward, the trajectory of inflation remains dependent on geopolitical developments. Even though commodity prices have softened as recessionary risks continue to rise in the advanced economies, elevated imported inflation is expected to be an upside risk with the outlook for crude oil remaining uncertain and significantly tethered to geopolitical conditions. “The risk is further amplified by an appreciating US Dollar. In addition, adverse climatic conditions pose a threat to the outlook on food inflation,” added the report.
Core inflation continues to remain sticky at six per cent in September and its trajectory will depend on the extent of pending pass-through of rising input costs to the final consumer. Considering these factors, RBI in its latest monetary policy statement estimated inflation in Q3 (October-December) and Q4 (January-March) FY22 at 6.5 per cent and 5.8 per cent, respectively.
Still optimistic
Meanwhile, the report highlighted that halfway into FY 2022-23, growth and stability concerns for India are less than that of the world at large. As measured by PMI composite index, economic activity level was higher for India at 56.7 compared with 51 for the world during April-September 2022. During the same period, the rupee depreciated by 5.4 per cent against the dollar — less than the depreciation of 8.9 per cent of six major currencies in the DXY Index.
The report believes that amidst challenges such as soaring dollar, higher interest rates, and external financing, one big strength that India has is its balance sheet in the household, corporate, and banking sectors. The stability it imparts in these times is priceless. Therefore, the country should be able to meet these challenges and keep the economy growing steadily. Prudent macroeconomic policies that have served the country well since 2014 continue to remain essential. “As is the case with batting in swinging conditions, balls well-left (policy errors avoided) will be as important as balls played well (policy decisions taken),” it concluded.