India’s growth may falter if inflation stays elevated, warns RBI

INDIA’S economy will continue to expand at a healthy pace but sticky inflation is hurting consumer demand and has become the main risk to growth, the Reserve Bank of India said in a monthly report released on Wednesday (Dec 20).   

“On a real-time basis, inflation is hurting discretionary consumer spending and this, in turn, is holding back topline growth of manufacturing companies as well as their capital expenditure,” the RBI said in its State of the Economy report. “If inflation is not brought back to the target and tethered there, there is a strong likelihood that growth may falter.”

The central bank said repeated food shocks reinforces its view that the category is the true “core” of inflation, and monetary policy will have to respond if food prices remain elevated and send “secondary impulses” across the economy.

The RBI expects inflation to average 5.4 per cent for the year that ends in March, and 4.6 per cent for the first three quarters of the next fiscal year. The RBI has said in the past it would want to see inflation settling around its target 4 per cent on a durable basis before considering rate cuts.

Earlier this month, the central bank paused for the fifth straight policy review and flagged inflation risks, indicating rates will remain higher for longer in Asia’s third-largest economy.   

The central bank sees strong economic activity over the rest of the financial year. The economy grew at 7.7 per cent in the first half, with the July-September quarter’s expansion rate coming as a surprise to analysts. Rural demand is recovering, while the government’s spending on infrastructure has been a “major driver of growth,” the report said. BLOOMBERG