RBI bulletin | Improving infrastructure, taming inflation key to growth

India needs to improve infrastructure, ensure low and stable inflation and maintain macroeconomic stability to revive animal spirits and spur growth, the Reserve Bank of India said on May 17.

“The Indian economy’s recovery remains resilient, although risks stemming from global developments have thwarted the momentum,” the central bank said in the monthly bulletin for May. “Inflation risks have become more accentuated in recent months.”

In order to achieve a higher growth path on a sustainable basis, private investment needs to be encouraged through higher capital expenditure by the government, the RBI said.

Retail inflation in India soared to an eight-month high of 7.79 percent in April, staying above the central bank’s tolerance ceiling for the fourth straight month. The RBI is mandated to target inflation at 4 percent with a tolerance level of 2 percentage points on either side. Higher inflation hurts the growth trajectory of the economy.

In an off-cycle policy meeting on May 4, the RBI hiked the repo rate by 40 basis points to 4.40 percent, citing inflation pressures. Economists expect inflationary pressures to dominate the RBI’s upcoming policy meetings.

Emerging economies face risks of capital outflows and higher commodity prices feeding into inflation prints, the RBI said today. The pandemic pressures also continue to impinge on near-term economic prospects, it added. The increase in international commodity prices also imparts a net term of trade shock that is widening the trade and current account deficits.

The global growth outlook also “appears grim” as geopolitical tensions linger, commodity prices remain elevated and withdrawal of monetary accommodation gathers speed, the RBI said.

In terms of improving the credit discipline in the country, India has come a long way, the RBI said in the bulletin.

The central bank will continue to engage with various stakeholders to improve the resolution frameworks and will also constantly adopt more sophisticated and updated risk management practices to take care of the systemic concerns that arise from the activities of the various credit intermediaries, it said.