The ongoing Russia-Ukraine war and the rise in global prices of commodities, including crude, along with other factors will chart the inflation path in coming months, said a report by the Finance Ministry. However, it is hopeful that government efforts and the Reserve Bank of India’s (RBI) policy measures could have an impact on inflationary pressure.
According to the monthly economic review (MER), prepared by the Economic Affairs Department, through the channel of imports, elevated global crude and edible oil prices now have a significant impact on India’s inflation outlook. Government measures to keep the prices of these commodities in check along with the recent hike in policy rates are expected to temper inflationary pressures in the economy. However, “the inflation trajectory in the coming months will be influenced more by the geopolitical situation, international commodity prices and supply chain management,” it said.
Combatting inflation
Retail inflation, based on Consumer Price Index (CPI), is already over the benchmark level of 6 per cent for months. Following this, the Monetary Policy Committee (MPC) held an-off cycle meeting earlier this month and decided to raise repo rate by 40 basis points (bps) to 4.40 per cent and also hiked cash reserve ratio to 4.5 per cent. Now, the indication is that the repo rate could be hiked further considering very high inflationary expectation.
“Rising food and energy prices are a global phenomenon and even several advanced nations have higher inflation rates than India. The RBI has signalled its determination to combat inflation and that too, will sustain macroeconomic stability and growth,” the MER said.
‘Relatively better placed’
The report also expressed optimism that India is unlikely to be affected much by the current global development. “Notwithstanding the turbulence associated with monetary tightening in advanced economies, the ongoing geopolitical conflict, lockdowns in parts of China and the supply-side disruptions that are likely in their wake, India is relatively better placed than most other nations to weather the storm and achieve steady growth during the current financial year,” the report said.
Further, it said despite the headwinds emerging from geopolitical developments and inflationary pressures, gradual and steady recovery in private consumption and robust exports have induced a healthy investment environment in the economy. It coincides with increased capacity utilisation in the manufacturing sector as seen in the RBI’s quarterly order books, inventory and capacity utilisation survey (OBICUS) for Q3 FY22.
Strong growth momentum
The IMF world economic outlook April 2022 projects India to be the fastest growing economy at 8.2 per cent in FY22 and 6.9 per cent in FY23. The report said lending credence to these projections, FY23 has begun with a strong growth momentum in economic activity as indicated by the robust performance of high frequency indicators such as e-way bill generation, ETC toll collection, electricity consumption and PMI manufacturing and services.
“Merchandise exports recorded a double-digit y-o-y growth for the 14th consecutive month ending in April. Non-oil non-gold imports also grew robustly on the back of improving domestic demand,” it said.