India's Economy Faces Risks To Growth And Inflation, But Domestic Demand Remains Strong

India's economy could see risks to growth and inflation due to challenges in the country's external sector and weather-related uncertainties, but domestic demand remains strong, the finance ministry said on Monday.

"Going forward, several factors, such as weaker-than-expected oil supply, higher-than-anticipated demand from China, intensification of geo-political tension and unfavourable weather conditions," may pose an upside risk to India's inflation forecasts, the ministry said in its monthly economic review.

The Reserve Bank of India (RBI) anticipates 5.2% inflation and 6.5% GDP growth in the fiscal year beginning April 1.

Retail inflation fell to an 18-month low of 4.7% in April, down from 5.66% in March, owing primarily to lower food prices.

The RBI's inflation objective is 4%, with a tolerance threshold of up to two percentage points on either side.

According to the report, the decline in international prices has led to a reduction in domestic inflationary pressures.

"Sticky" core inflation has moderated "significantly" to an almost three-year low in April, signalling a pass-through of lower input costs by producers, it said.

Despite the uncertainties surrounding rainfall, crop growth is unlikely to decrease, according to the analysis. Prices for all commodities, with the exception of precious metals, are expected to moderate this year, but they will stay substantially above pre-pandemic levels, according to the report.

Nonetheless, prices of commodities sensitive to El Nino weather effects, such as coffee, rice, palm oil, and natural rubber, must be constantly checked, according to the ministry.

As inflation continues to fall, demand will strengthen, laying the groundwork for a virtuous capex upcycle, it added.
The research, however, stated that April results are too early to determine the prediction for the entire year.
"Consumption has shown steady and broad-based growth, while investment in capacity creation and real estate is finding traction," the ministry said.