India’s inflation trajectory faces potential hurdles from both natural and geopolitical factors, according to the latest bulletin from the Reserve Bank of India (RBI). The central bank highlighted concerns over food price pressures amidst ongoing disinflation efforts, exacerbated by disruptions from adverse climate events and geopolitical tensions.
In its ‘State of the Economy’ article, the RBI staff underscored the impact of extreme weather events and geopolitical uncertainties on India’s inflation outlook. With the country bracing for an increase in heat-wave days during April to June, as forecasted by the National weather office, the challenges to food production and distribution become more pronounced.
Despite recent improvements, India’s retail inflation moderated to a five-month low of 4.85% in March, down from 5.09% in the previous month. However, the RBI remains cautious, emphasizing the need for sustained efforts to align inflation with the 4% target. The central bank projects retail inflation to average around 4.5% in the fiscal year 2024-25.
On the economic front, India continues to witness a positive trend in real gross domestic product (GDP) growth, buoyed by robust investment demand and optimistic business and consumer sentiments. The RBI noted a significant contribution from “capital deepening,” driven by continued public investment and supported by enhancements in productivity.
India’s economy exceeded expectations with a growth rate of 8.4% in the October-December period, marking its fastest expansion in eighteen months. Furthermore, the bulletin highlighted the country’s comfortable foreign exchange reserves and anticipated capital inflows, which are expected to bolster stability in the foreign exchange market.
As India navigates through these challenges, the RBI emphasizes the importance of closely monitoring incoming data to ascertain the trajectory of disinflation. While the economy shows resilience, uncertainties stemming from extreme weather conditions and geopolitical tensions underscore the need for vigilant policymaking to sustain growth and stabilize inflation.
