RBI Stays Vigilant On Price Pressures In Inflation; Says Strength In Dollar Is Global Risk

The Reserve Bank of India (RBI) in its bulletin for October 2023 said the global growth appears to have lost pace from the third quarter of 2023, adding that strength in the US dollar now poses a global risk. In the case of India, RBI said, a broad-based gaining of momentum is discernible in high-frequency indicators. Nevertheless, RBI continues to be vigilant in monitoring price pressures in CPI inflation.

In the chapter on 'State Of Economy' in Bulletin for October 2023, RBI said, "Global growth lost pace from Q3:2023 on the back of weak manufacturing activity and tight financial conditions in advanced economies even as several emerging market economies posted growth surprises. Surging yields and soaring crude oil prices have emerged as proximate risks to global growth."

RBI added, "The US dollar's strength is now a global risk, tightening the already tight financial conditions even more. Even as energy importers reel under the impact of soaring crude oil prices that resurrect the spectre of inflation alongside external vulnerabilities, the US dollar gets ever stronger on the heft of surging treasury yields, creating a pernicious feedback loop."

Coming to India, RBI said, "A broad-based gaining of momentum is discernible in high-frequency indicators. Deleveraging and higher capacity utilisation have enabled capital-heavy industries to gain traction. The Indian rupee (INR) is exhibiting low volatility. Inflation has moderated from its July peak, bolstering macroeconomic fundamentals."

In its concluding remarks, RBI stated that in this strange and heady environment of formidable global headwinds and resilient domestic economic activity, the MPC met during October 4-6 for its fourth bi-monthly meeting for the year 2023- 24. Its resolution reflects the approaching of an inflection point in the conduct of monetary policy in
India.

For inflation, RBI's bulletin said, "With this growth-inflation configuration going forward, the MPC decided to remain on high vigil on price pressures, with a preparedness to undertake appropriate actions, should the recurrence of food price shocks and the incidence of global spillovers accumulate within the system and impart persistence to inflation formation in the months ahead."

It added, "With inflation ruling above the upper tolerance level for two successive months, priority has been assigned to maintaining a disinflationary stance and the alignment of inflation outcomes with the target."

The bulletin quoted Governor Shri Shaktikanta Das words which were "The Indian economy is forging ahead in a challenging global environment...Our commitment to ensure financial stability reinforces our emphasis on price stability and anchoring of inflation expectations. This would keep inflation risk premium low and improve our competitiveness, productivity and growth potential."

In regards to the economy, RBI said, "Growth is expected to gain momentum through the rest of the year, especially from the impetus of festival spending. On the external front, the current account deficit (CAD) is modest and more than financed, with foreign exchange reserves providing a strong buffer that is insulating the economy from global spillovers as well as from the slowdown in external demand."

While recognising global risks and the volatility in financial markets that they entail, RBI said the projection of real GDP growth for 2023-24 was also retained at 6.5 per cent by the MPC, as of June.

Accordingly, the six-member MPC maintained 6.5% as the projection of growth for 2024-25.