As food prices spiral, fight against inflation not over: RBI report

The spike in food prices at the onset of the monsoon season has corroborated the Reserve Bank of India’s (RBI’s) view that the fight against inflation is far from over, the State of the Economy report of the central bank said.

At the same time, the report said that the country is poised to become the fastest-growing major economy in the world, notwithstanding some sequential moderation in economic activity in June.

Consumer Price Index (CPI)-based inflation rate increased to 4.8 per cent in June 2023, from 4.3 per cent in May, primarily on account of an increase in food inflation.

“Between May and June, CPI recorded a positive momentum of 100 basis points (bps), which was partially offset by a favourable base effect of around 50 bps, resulting in a rise in headline inflation by 50 bps,” the report said.

The month-on-month increase in food and fuel prices was roughly 220 bps and 5 bps, respectively.

Core group (excluding food and fuel) prices remained broadly unchanged.

“Food price spikes typical of the onset of the monsoon drove up headline inflation in June, corroborating the monetary policy committee’s view that the fight against inflation is far from over and monetary policy has to stay the course on the arduous last leg of the journey to align inflation with the target,” the report said.

The RBI’s inflation target is 4 per cent, within a range of 2 per cent on either side.

The central bank, which increased the policy repo rate by 250 bps between May 2022 and February 2023, kept rates unchanged in the April and June policy reviews.

On the growth front, the report painted an encouraging picture.

“The Indian economy is poised to be the fastest-growing major economy in the world despite some sequential moderation in economic activity in June,” it said.

“The index of supply-chain pressure for India remains below its historical average, supporting growth impulses.

“Our economic activity index nowcasts gross domestic product (GDP) growth for Q1:2023–24 at 7.8 per cent,” it said.

The June monetary policy review projected growth for the first quarter of 2023-24 at 8 per cent.

For the full fiscal year, GDP growth was projected at 6.5 per cent.

The report said manufacturing and services activity remains in expansion mode, albeit with some sequential moderation in June in composite terms from a near 13-year high in April and May.

The report said coincident indicators for the construction sector grew robustly, with cement production at a six-month high on the back of public spending on infrastructure and strong demand for both residential and commercial real estate.

Domestic and international air travel is scaling new records across the nation’s 136 operational airports and airstrips, it observed.

However, consumption expenditure continues to be hamstrung by lingering memories of elevated price pressures.

The report noted that scheduled commercial banks’ credit growth remained strong at 16.2 per cent as of June 30.

“The rapid pace of personal loan growth (both housing and non-housing) has been supporting overall credit expansion,” it said, adding that the share of personal loans in total bank credit has surged to 28 per cent in 2022–23, from 21 per cent in 2017–18.

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