“Inflation is already biting into urban consumption demand and corporates’ earnings and capex. If allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports,” said central bank researchers led by deputy governor Michael D Patra.
They said that RBI remained consistent with the mandate of “price stability while keeping in mind the objective of growth”. The underlying mandate of
maintaining financial stability was also adhered to.
India’s headline inflation, measured by consumer price index, rose to a 14-month high of 6.21% in October, up from 5.49% in September. Following this, expectation of an immediate policy rate cut has ebbed even as Finance Minister Nirmala Sitharaman wanted interest rates to be “far more affordable”.
Even as space for monetary easing has opened up in the advanced economies, emerging market central banks face challenges from external headwinds, leading to differences in policy responses, the RBI researchers highlighted.
The state of economy report however projected a bullish outlook for the medium-term backed by the strong macro-fundamentals, despite the record dollar outflows from Indian markets forcing the rupee to depreciate to a new low and deplete forex reserve by nearly $30 billion in six weeks.
“The Indian economy is exhibiting resilience, underpinned by festival-related consumption, and a recovering agriculture sector,”
Record production estimates for kharif foodgrains as well as rabi crop would augur well for future farm income and rural demand.
“The slack in speed observed in the second quarter of 2024-25 is behind us as private consumption is back to being the driver of domestic demand with festival spending lighting up real activity in Q3,” they observed.
RBI maintained that the views expressed in the report are of the authors of the report.
Domestic financial markets are going through a correction with relentless hardening of the US dollar and equities being under pressure from persistent portfolio outflows. The rupee however performed better than the Asian peersand depreciated by a mere 0.3% in October and remained the least volatile.
“Despite pressures in the bond and equity markets from global uncertainty and fluctuating foreign portfolio investments, financial conditions are likely to remain accommodative as reflected in corporate bond issuances and FDI inflows,” the report noted.
India saw FDI inflows of $42 billion during the first half of the fiscal, as compared with $33.5 billion inflows in the year ago period.
The equity market correction was however an outcome of cumulative net outflows of around Rs 1.2 lakh crore by FPIs from equities from late September till November 14, 2024 – the highest ever in absolute terms. However, RBI researchers pointed out that on a relative basis, when FPI outflows are measured in relation to total market capitalisation, this episode of outflows remains modest so far in comparison with the sell-offs in previous episodes.