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RBI Bulletin | Aggregate demand firm, poised to expand further as festival season sets in

As per RBI staff's State of the Economy article, the Indian economy is "poised to shrug off" the weakening of momentum witnessed in April-June

September 16, 2022 / 07:24 PM IST

The upcoming festival season should provide a boost to already-firm domestic demand conditions, Reserve Bank of India (RBI) staff said on September 16.

"Services are on a roll," the central bank's staff wrote in the regular State of the Economy article, published as part of the monthly bulletin of the central bank.

"Sales of passenger vehicles, fast moving consumer goods and property, and the movement of goods and people suggest that aggregate demand is firm and poised to expand further as the festival season sets in," the article added.

The views expressed in the State of the Economy article are those of the authors, with Deputy Governor Michael Patra among them, and do not represent the views of the RBI.

As per the article, the Indian economy is "poised to shrug off" the weakening of momentum witnessed in April-June, when GDP growth surged to 13.5 percent, albeit due to a favourable base effect.

Not only was the April-June GDP growth rate lower than economists' expectations of 15 percent, it was well below the RBI's forecast of 16.2 percent.

In July-September, the RBI staff noted, high-frequency indicators suggested economic activity continued to recover, albeit at a slower pace. Further, the yield curve seemed to suggest an improvement in long-term growth prospects, they added.

On prices, the article said the rise in headline retail inflation in August to 7 percent was "largely in line with this prognosis".

"...we maintain our view that inflation momentum should ease in Q3 (October-December) and turn mildly negative in Q4 (January-March 2023). With base effects being favourable in the second half of 2022-23, inflation should moderate, although upside risks are in the air," the article said.

As per the RBI's official forecasts, retail inflation is seen averaging 6.4 percent in October-December and 5.8 percent in the first quarter of 2023.

The RBI's Monetary Policy Committee has looked to tackle the elevated inflation by increasing the repo rate rapidly in the last four months, a period which has seen the policy rate go from 4 percent to 5.4 percent. However, the central bank will fail to meet its inflation mandate unless inflation crashes to 4.1 percent or lower in September, data for which will be released on October 12.

"At this critical juncture, monetary policy has to perform the role of nominal anchor for the economy as it charts a new growth trajectory. The focus should be on being time consistent in aligning inflation with the target. In this context, front-loading of monetary policy actions can keep inflation expectations firmly anchored and reduce the medium-term growth sacrifice," the article said.
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first published: Sep 16, 2022 06:49 pm