India poised to consolidate, accelerate recovery: RBI article

Economic activity in India has remained resilient and is poised to expand further, though aggressive and internationally synchronised monetary tightening has further weakened global economic prospects, according to Reserve Bank of India (RBI) officials.

This was due to acceleration of domestic demand as the contact-intensive sectors were experiencing a bounce-back, the officials – led by deputy governor Michael D. Patra – wrote in an article in the latest issue of RBI’s monthly Bulletin.

“Robust credit growth and fortified corporate and bank balance sheets provide further strength to the economy. Headline inflation is set to ease from its September high, albeit stubbornly, on the back of easing momentum and favourable base effects,” they said in the article titled ‘State of the Economy’.

These factors will entrench India’s prospects as one of the fastest-growing economies of the world, they added.

“In an uncertain and fragile global economic environment, the Indian economy showed resilience. Indicators of aggregate demand indicate that the onset of the festive season and pent-up demand kept growth impulses strong,” the authors said.

“Our economic activity index that employs a dynamic factor model (DFM) with 27 high-frequency indicators nowcasts GDP growth for Q2: 2022-23 at 6.4%. Several high-frequency indicators remain upbeat,” they added.

Looking ahead, India was poised to consolidate and accelerate the recovery over the rest of the year, they said, analysing various aspects of the economy.

“The momentum of real GDP growth is expected to shed the drag embedded in the NSO’s [National Statistics Office] estimates for the first quarter of 2022-23 and move into positive territory in the remaining quarters, including on a seasonally adjusted basis,” they said.

“Although this may not be evident in year-on-year growth rates due to unfavourable base effects, q-o-q annualised rates will reflect the underlying recovery,” the officials added.

Emphasising that contact-intensive sectors would likely lead the rejuvenation as the restraint due to the pandemic waned, they said festival-related spending was already boosting consumption demand with positive externalities for other components of domestic demand.

They said easing in international price pressures embodied in commodity and supply-chain pressures were likely to contribute to the softening of costs and prices.

“While the persistence of headline CPI inflation above the tolerance band for three consecutive quarters (up to September) will trigger mandated accountability processes, monetary policy remains focussed on re-aligning inflation with the target,” they said.

They said easing of inflation would inject confidence into both consumers and businesses, recharge animal spirits and investment and improve the international competitiveness of India’s exports.

However, they said, “the fight against inflation will be dogged and prolonged, given the long and variable lags with which monetary policy operates, and fraught with uncertainties. Yet, if we succeed, we will entrench India’s prospects as one of the fastest-growing economies of the world enjoying a negative inflation differential with the rest of the world.”

“This happy outcome will re-enthuse foreign investors, stabilise markets and secure financial stability on an enduring basis,” they added.