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Informist, Thursday, Jul 18, 2024

 

--RBI paper: Global economic activity appears to be strengthening 

--CONTEXT: Comments from RBI staff paper on state of economy 

--RBI paper: Global trade in goods and services gathering momentum 

--RBI paper: India econ momentum quickening in Jul-Sep 

--RBI paper: Better farm sector outlook bright spot for demand 

--RBI paper: Revival of rural spending bright spot for demand 

--RBI paper:Food price pressures threaten spillover to wages, rents 

--RBI paper: Halt in inflation decline shows work still in progress 

--RBI paper:Must aim to lower inflation to 4% amid uncertain outlook 

--RBI paper: Don't need CPI at 4% sustainably to change policy stance 

--RBI paper:Policy steps must look at enduring move of CPI to 4% aim 

 

NEW DELHI – The Monetary Policy Committee must continue on its path of aligning headline inflation to the 4% target given the high uncertainty surrounding the inflation outlook, Reserve Bank of India's staff said in a paper today. However, this does not imply that "inflation should reach 4% and stay there before monetary policy considers a change in stance, the paper said.

 

"Instead, based on a careful evaluation of the balance of risks, an enduring movement towards the target should provide signals to forward-looking monetary policy to respond," the paper on the 'State of the Economy' in RBI's bulletin for July said. The views expressed in the paper, authored by RBI officials, including Deputy Governor Michael Patra, do not necessarily reflect those of the central bank.

 

"Close to half a century ago, seminal work pointed to the phenomenon of time inconsistency. When monetary policy authorities committing to price stability renege on that commitment in the pursuit of short-run gains of increasing growth, they can end up losing credibility, unhinging inflation expectations and triggering a surge in inflation," the paper said. "This can also undermine growth sustainability."

 

CPI inflation has stayed above the RBI's 4% target for 57 consecutive months. Headline inflation rose to a four-month high of 5.08% in June from a one-year low of 4.80% in May. The central bank has projected CPI inflation to moderate to 3.8% in Jul-Sep, before rising again to 4.6% in Oct-Dec and 4.5% in Jan-Mar.

 

While core inflation, which strips out food and fuel items, remained at a record low of 3.1% in June, food inflation rose to a six-month high of 9.36% last month. "The argument that food price shocks are transitory does not seem to be borne out by the actual experience over the past one year – too long a period for a shock to be termed as transitory!" the paper said. 

 

This accumulation of food price pressures threatens spillovers to wages, rents and expectations, the paper said. "Against this background, the MPC of the RBI has committed to align inflation durably to the target. Till that is achieved, the recent halting declines in inflation readings have to be regarded as work still in progress," it said.

 

Economists expect the RBI's rate-setting panel to keep interest rates unchanged at 6.50% till Oct-Dec, as inflation remains above the target and growth continues to be robust. 

 

The central bank has projected India's GDP to grow 7.2% this fiscal as compared to 8.2% in 2023-24 (Apr-Mar). "The Indian economy sustained a strong growth momentum, despite geopolitical headwinds and some build-up of supply chain pressures," the paper said.

 

GDP growth in Apr-Jun is likely to be 7.4%, as per the RBI's economic activity index, slightly higher than the monetary policy statement's forecast of 7.3%. The September quarter has also begun with signs of quickening momentum in the economy, the paper said.

 

The improvement in the outlook for agriculture, with the projection of above-normal monsoon rains this year, and a revival in rural spending "put the spotlight on what is shaping up to be the bright spot of the evolution of demand conditions in 2024-25", the paper said.

 

Even globally, economic activity appears to be strengthening across advanced economies and emerging market economies, the paper said. Global trade in goods and services is also gathering momentum.  End

 

Reported by Shubham Rana

Edited by Tanima Banerjee

 

 

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