Kolkata: The Reserve Bank of India believes that global interest rates may have peaked while achieving the inflation target looks like a protracted journey. In India, repeated food shocks are preventing the positive impact of falling core inflation from manifesting itself in a lower Consumer Price Index, the central bank said in its report on the state of the economy.
“While the tightening cycle appears to have been exhausted, the way forward remains limited by the eventual decline in inflation to targets, which is proving daunting as tailwinds materialize,” researchers with the 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 repeated 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 additional risks.
Headline inflation, as measured by CPI, moderated to 5.1% in January from 5.7% in December 2023. Food inflation, although falling to 7.6% from 8.7%, was still higher than the comfortable level. Core inflation decreased to 3.5% from 3.8% in the same period.
Globally too, central banks are facing some factors that may prolong this: 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 gold policy action in 2024: not declaring a premature victory and also not turning off the resilience of growth,” said the RBI 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, mixed with support for new drivers of growth because borrowing costs facilitate and job creation brings with it some real wage gains,” they observed.
RBI maintains that the views expressed in the report on the state of the economy are those of the researchers and not necessarily of the central bank.
Locally, economic activity is holding up well and is expected to be supported by the momentum in investment demand, optimistic business sentiments and growing consumer confidence. RBI has projected real GDP growth for 2024-25 at 7%, expecting to continue the 7% plus growth for the fourth year in a row.