This is an archive article published on February 24, 2024

Opinion Express View on inflation in India: A good report card

A recent RBI study points to welcome trend: Combination of steady growth momentum and moderate inflation continues

Other indicators of private consumption such as passenger vehicles and two-wheelers are also showing healthy growth in both urban and rural areas.

By: Editorial

February 24, 2024 07:12 AM IST First published on: Feb 24, 2024 at 07:12 AM IST

A report on the state of the economy, prepared by economists at the RBI, presents an optimistic assessment about India’s growth prospects. Based on high frequency indicators, it says that the economic momentum observed in the first half of the year is likely to have continued in the months thereafter. Growth for the third quarter (October-December) has been pegged at 7 per cent. This is higher than assessments by some analysts.

Considering that the National Statistical Office has projected growth at 7.3 per cent for the full year, this would imply a growth of around 7 per cent in the ongoing quarter (January-March) as well. The report is also optimistic on the inflation front, terming recent developments as “favourable”. Retail inflation moderated in January, after being elevated in November and December. This continuing combination of steady growth momentum and moderate inflation is welcome news on the macroeconomic front.

On growth, there are several notable points. While some analysts continue to express concerns over the state of the rural economy, the NielsenIQ data cited in the report shows that the gap between rural and urban areas is narrowing — FMCG companies observed a 5.8 per cent growth in rural volumes and a 6.8 per cent growth in urban areas in the third quarter. Other indicators of private consumption such as passenger vehicles and two-wheelers are also showing healthy growth in both urban and rural areas.

Alongside, real estate and construction continue to witness robust growth driven by household investments in residential real estate and public sector capital expenditure. The report expects investments by the private corporate sector to pick up and “fuel the next round of growth”. In his comments in the recent monetary policy committee meeting, RBI Governor Shaktikanta Das has also expressed optimism about private investments, noting that the “private capex cycle has turned up”. However, so far, investment activity has picked up only in a few sectors, and questions over more productive forms of job creation remain.

There is reason for optimism on inflation. In January, retail inflation fell to 5.1 per cent, down from 5.69 per cent in December. While there are upside risks to food inflation, Skymet, the private weather forecaster, has predicted a normal south-west monsoon. Economists at the RBI believe that “inflation expectations may stabilise and edge down.” As per the RBI’s own forecasts, inflation is expected at around 4.5 per cent in 2024-25. Jayanth Varma, member MPC, notes that these inflation projections translate to a real interest rate of 2 per cent, which may be considered high at the current juncture. However, Governor Das, and other members of the MPC, believe that the “job on the inflation front” is not over. Over the coming months, if inflation falls in line with the central bank’s projections, it could open up space for policy to pivot.