India's high-frequency indicators show that the second quarter of 2023-24 is shaping up well amid a retreat in food prices and an improvement in rainfall in September, the finance ministry said on September 22.
"India’s economic outlook for FY24 remains bright. Economic activity maintained its momentum...The monsoon deficit of August has been partially plugged in September and that is good news. Prices of selected food items that drove the inflation rate above 7 percent in July are on the retreat," the ministry said in the monthly economic report for August.
It, however, flagged the impact of a deficit monsoon last month on Kharif and Rabi crops as well as the recent run-up in crude oil prices as key concerns that needed to be assessed.
"Recent run-up in oil prices is an emerging concern but, no alarms yet," the report said. A decision by Saudi Arabia and Russia to extend production cuts till the end of 2023 has pushed up crude prices. On September 22, oil prices rose due to mounting supply concerns following Moscow's decision to temporarily ban fuel exports.
The ministry also acknowledged that a potential stock market correction as well as geopolitical developments could hurt investment sentiment in the second half of the financial year, however, their impact on underlying economic activity should be relatively contained.
"Offsetting these risks are the bright spots of corporate profitability, private sector capital formation, bank credit growth and activity in the construction sector. In sum, we remain comfortable with our 6.5 percent real GDP growth estimate for FY24 with symmetric risk," the report added
While, India's Gross Domestic Product (GDP) growth rate hit a four-quarter high in April-June, rising to 7.8 percent, headline retail inflation rate eased to 6.83 percent last month after touching a 15-month high in July.
Inflation trajectory
India's headline retail inflation is expected to trend downwards in the coming months with vegetable prices correcting and "government and monetary measures in place", the ministry said.
Attributing the moderation in food inflation last month to steps taken by the government, the report added that the calibrated measures taken by the Centre, including adjustments in the duties of many critical inputs as well as monetary policy tightening, also helped reduce core inflation to a 40-month low.
The drop in Consumer Price Index (CPI) inflation in August was led by the moderation in food inflation, which fell to 9.94 percent from 11.51 percent in July. Within food, the price fall was led by vegetables, whose index was down 5.9 percent from July.
The ministry said that government bond yields were expected to fall as inflationary pressures recede, adding that the Centre's commitment to fiscal prudence would also help keep borrowing costs in check.
The Centre has set a fiscal deficit target of 5.9 percent of the GDP for the current financial year.
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