Kolkata: The Reserve Bank of India believes that global interest rates may have peaked while achieving the inflational target looks like a prolonged journey. In India repeated food shocks are preventing the positive impact of falling core inflation from manifesting itself in lower Consumer Price Index, the central bank said in its state of the economy report.
“While the tightening cycle appears to have run itself out, the path forward remains bounded by the final downslide of inflation to targets which is proving daunting due to the materialisation of tail events,” researchers with RBI’s economic wing said.
In India, CPI inflation was projected at 4.5% for the financial year 2024-25, a good 90 basis points lower than the estimated average for 2023-24.
But, the large and repetitive food price shocks remained a concern, with geopolitical events and their impact on supply chains, and volatility in international financial markets and commodity prices posing upside risks.
Headline inflation, as measured by CPI, moderated to 5.1% in January from 5.7% in December 2023. Food inflation, although fell to 7.6% from 8.7%, was still higher than the comfort level. Core inflation eased to 3.5% from 3.8% in the same period.
Globally too, central banks are confronted with some factors that may render this prolonged: the dissipation of improvements in supply chains and falling commodity prices; extreme weather events, including the current el nino; and escalations of geopolitical hostilities.
“Hence, they are increasingly focusing on a goldilocks policy performance in 2024: not declaring premature victory and also not snuffing out the resilience of growth,” said RBI’s research team headed by deputy governor Michael D Patra.
“Increasingly, the focus will turn to putting the fiscal house in order in the context of overburdened debt levels but here too, it may have to be consolidation with a human face, blended with support for new drivers of growth as borrowing costs ease and job creation brings with it some real wage gains,” they observed.
RBI maintains that the views expressed in the state of the economy report are of the researchers and not necessarily of the central bank.
Locally, economic activity is holding up well and is expected to be backed by the momentum in investment demand, optimistic business sentiments and rising consumer confidence. RBI projected the real GDP growth for 2024-25 at 7%, expecting to continue the 7% plus growth rate for the fourth year in a row.
