Time to excoriate inflation is now: RBI Bulletin

Weighing in on India’s slowing growth and high inflation conundrum, senior Reserve Bank of India (RBI) officials asserted in an article on Tuesday that the “time to act is now to excoriate inflation and revive investment strongly”, even as they believed the growth trajectory is poised to lift in the second half of the year.

Attributing the July-September quarter 5.4% GDP growth blip to domestic drivers of private consumption and fixed investment, the central bank’s officials led by Deputy Governor Michael Debabrata Patra, said high frequency indicators (HFIs) for the current third quarter (Q3) of 2024-25 signal the economy is recovering from the slowdown in momentum thanks to strong festival activity and a sustained upswing in rural demand.

In an article on the State of the Economy published in the December edition of the RBI Bulletin, the officials said that GDP growth is likely to recover to 6.8% and 6.5% in Q3 and Q4, respectively, and noted that growth will improve to 6.7% in 2025-26, with the headline inflation expected to average 3.8% next financial year. The recovery they expect in coming months would be driven ‘mainly by resilient domestic private consumption demand’, the article said.

On the inflation front, the RBI officials said that the decline in retail inflation to 5.5% in November from 6.2% in October was linked to easing food prices, “high frequency food price data for December so far (up to 19th) showed a fall in rice prices, while wheat and atta prices continued to firm up”. Edible oil prices also continued exhibiting upside pressures, onion and tomato prices fell, while potato prices remained range bound, the officials mentioned.

Moreover, input costs across the manufacturing and services sectors hardened in November, compelling producers to raise prices at the fastest pace in 11 and 12 years, respectively, they noted.

“The erosion of purchasing power due to repeated inflation shocks and persisting price pressures is starkly reflected in weakening sales growth of listed non-financial non-government corporations. Their outlook on demand conditions also remains subdued as no let-up in the incidence of price shocks seems to be in sight; they will increasingly be inclined to pass on input costs to selling prices. Consequently, there is no robust capacity creation by investing in fixed assets,” the article said, arguing that firms are churning existing capacity to meet the ‘inflation-dented consumer demand’, resulting in lacklustre private investment.

Arguing that the slowdown in consumer demand seems to be associated with slower corporate wage growth, they said that the slowing rate of nominal GDP is also emerging as a headwind that could hinder fiscal spending, including on capex, to achieve budgetary deficit and debt targets.

“If inflation is allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports. The time to act is now to excoriate inflation and revive investment strongly, especially as the usual winter easing of food price is setting in and the prospects of private consumption and exports accelerating are getting brighter,” they underlined.

While the global economy would enter 2025 with resilience as disinflation and monetary policy pivots gain traction, supported by recovering real incomes, steady labour markets, and a gradual revival in global trade, the article warned that ongoing geopolitical tensions, concerns over growing protectionism and a large public debt overhang would have adverse implications for emerging market economies (EMEs).

The currencies and equities of EMEs would remain vulnerable to the sharp bouts of declines seen in 2024 in a highly uncertain environment for trade and capital flows, they concluded.