Centre, RBI on high alert as inflation still a risk, says finance ministry

India's headline retail inflation rate fell to a five-month low of 4.87 percent in October

Inflationary risks continue to persist keeping the Centre and the Reserve Bank of India (RBI) on high alert, the finance ministry's monthly economic report for October released on November 21 has said.

However, the recent decline in international crude oil prices and continued moderation in core inflation are likely to control inflationary pressures, the report said. The central bank has also recognised this development evident from the indication that any further tightening of monetary policy would likely occur when the transmission was closer to completion and if the situation warranted, it said.

India’s crude oil basket has averaged $83.93 a barrel in November so far, compared with $90.08 a barrel in October, government data shows.

India's headline retail inflation rate fell to a five-month low of 4.87 percent in October, staying within the Reserve Bank of India's (RBI) tolerance band of 2-6 percent for the second consecutive month. Food inflation, however, was little changed at 6.61 percent after previous month's print of 6.62 percent. Core inflation though (inflation excluding food and fuel) dropped to 4.2 percent last month from 4.5 percent in September.

Moneycontrol reported on November 15 citing a government source that even as the headline figure had come down to an extent, food inflation needs to fall more.

The government has taken a raft of measures over the last couple of years to bring down retail inflation, ranging from export bans on wheat, rice, and onion to the sale of discounted tomatoes.

"As a result of all the initiatives (taken by the government), the contribution of ‘select’ food items to overall inflation has declined from 60.6 percent in July to 53.6 per cent in October, with the corresponding contribution of vegetables declining drastically," the report said, adding that the RBI's steady monetary policy stance also helped core inflation to progressively align with the inflation target and support GDP growth.

The report also flagged the need to constantly monitor financial flows in the external sector since it has a direct impact on the value of rupee and the balance of payments.

Though India's merchandise trade deficit hit an all-time high of $31.46 billion in October as gold imports nearly doubled from last year, economists expect a moderation in the gap going ahead and are not yet concerned about the impact of this development on the country's current account dynamics.

Among key risks, the report added that a fuller transmission of the monetary policy may also temper domestic demand.

"On balance, however, India’s growth experience in FY24 should continue to be a positive outlier
as compared to other major economies. In the medium-term, thanks to the sustained focus on
public investment in infrastructure and advances in digital public infrastructure, India can look
ahead to the prospect of a longer economic and financial cycle than in the past, subject to global
factors," it said.

This report by finance ministry reiterated that the Indian economy has been "remarkably resilient" amid a global slowdown, buoyed by solid domestic demand. The Indian government and the RBI expect the economy to post a GDP growth rate of 6.5 percent in 2023-24, although market expectations are closer to 6 percent. However, GDP growth for the July-September quarter - data for which will be released on November 30 - may exceed the RBI's forecast, also pegged at 6.5 percent.