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Inflation is hurting consumption, strong likelihood that it may hold back India's growth: RBI.

Date: 21-12-2023
Subject: Inflation is hurting consumption, strong likelihood that it may hold back India's growth: RBI
The Reserve Bank of India (RBI), in its December bulletin, highlighted a concerning trend, stating that the real-time inflation is adversely impacting discretionary consumer spending. This, in turn, is impeding the overall growth of manufacturing companies, including their capital expenditure, it said.

The RBI's observation underscores the immediate and tangible effects of inflation on the economy, particularly in the context of consumer behavior and corporate performance. The central bank emphasized that unless inflation is promptly brought back to the target and effectively controlled, there is a substantial risk of stalling economic growth.

The bulletin stated that broad-based strengthening of economic activity in India will likely be sustained and retail inflation is expected to ease to 4.6 per cent in the first three quarters of 2024-25 from the latest print of 5.6 per cent. The pace of global growth may slow further in 2024 while disinflation at varying pace in different geographies may pave the way for interest rate reductions, said the article on the state of the economy.

"In India, the broad based strengthening of economic activity that is underway will likely be sustained by easing input costs and corporate profitability," it said.

Consumer Price Index (CPI) based inflation rose to 5.6 per cent in November as the recurrence of food price spikes punctured a brief respite in September and October.

The link between inflation, consumer spending, and manufacturing growth is a critical dynamic that the RBI is closely monitoring.

In its December policy meeting, the central bank left its inflation forecast for this fiscal year unchanged at 5.4 per cent, despite food price rise concerns, uncertainty around crude costs even amidst a recent slump and chances of domestic growth momentum creating demand pressure on inflation.

While core inflation shows a downward trend, the persisting concern revolves around food inflation. Rising prices of essential commodities like onions and tomatoes may keep the headline Consumer Price Index (CPI) elevated in the coming months. Additionally, lower reservoir levels pose a potential challenge to Rabi output next year, economist Sujan Hajra, had stated.

India's retail inflation, however, exhibited a positive trend, easing to a four-month low of 4.87 per cent in October, primarily attributed to the cooling prices of food items.

 Source Name: Economic Times

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