The positive CPI inflation reading for October 2023 is a “welcome relief” but it does not mean that India is “out of the woods” yet as elevated food prices continue to risk to inflation expectations, as per RBI’s State of the Economy report.

“We are not out of the woods yet and have miles to go, but readings of around 5 per cent and 4.9 per cent in September and October, respectively, are a welcome relief from the average of 6.7 per cent in 2022-23 and 7.1 per cent in July-August 2023,” said the report, which was released as part of RBI’s November bulletin.

The CPI inflation for October was the lowest in three months, led by an almost 200 bps fall in core-inflation to a 43-month low.

Food inflation

“The only risk to the RBI’s resolve to align headline inflation with the target of 4 per cent is food inflation. Several constituent prices are already firming up — onions, tomatoes, cereal, pulses and sugar — with the potential to disrupt the gains made in the last two months,” it said, adding that RBI is bracing for upticks in the readings for the next two months.

Globally too, inflation has been abating but at a slow, stubborn pace and is likely to remain uncomfortably above targets in many countries for the third year in succession, likely due to food and energy price shocks.

“With these prospects, interest rate expectations remain firm, bringing in their train two fears: recession and financial instability. Financial markets are undergoing a broad repricing, posing another risk to the global outlook,” it said, adding, however that India’s GDP growth is expected to surpass RBI’s projections. RBI has pegged a GDP growth for Q2FY24 at 6.5 per cent and for Q3FY24 at 6 per cent.

“Early estimates of kharif output, which would be incorporated into Q2 and Q3 GDP estimates, have been adversely impacted by the uneven spatio-temporal distribution of the south west monsoon across all crops. A strong increase in rabi sowing acreage in spite of lower reservoir levels and deficient north-east monsoon rainfall may, however, compensate and improve agricultural production for the year as a whole.”

Strong consumption

On a whole, consumption side continues to be strong with “festival demand remaining ebullient”, RBI said, adding that investment demand is also resilient with government  infrastructure spending, uptick in private capex, automation, digitalisation and indigenisation providing a boost.

In urban areas, consumer sentiment is upbeat, with 80 per cent of consumer durable purchases, especially in home appliances, being made through consumer financing schemes with attractive equated monthly instalment (EMI) offers. However, entry-level demand is relatively subdued as ‘premiumisation’ shows clear signs of developing into a consistent trend.

“MSMEs supplying to in-demand segments are also experiencing a surge in orders, particularly from businesses selling through platforms and large format stores. In turn, bank loans to MSMEs is strong,” it said.