Moneycontrol Pro Panorama | RBI forecasts and butterflies

In today’s edition of Moneycontrol Pro Panorama: Market reaction to July inflation data, the war over submarine cables, Indian companies not interested in US Steel sale, time is ripe for India to grow stronger, and more

Aparna Iyer

August 18, 2023 / 15:52 IST

Reserve Bank of India

Dear Reader,

Economists, market analysts and anyone with an intimidating spreadsheet claiming to predict the future should know this. Forecasts are like butterflies. You think you know them; you chase them, you think you have caught them but all they do is fly off. This discomfiting process has become all too real for the Reserve Bank of India (RBI), again.

Its August policy revised the second quarter forecast for retail inflation to 6.2 percent which lasted less than a week before the July inflation
decimated the chances of this forecast coming true. My colleague Siddharth Upasani wrote this is shorter than a butterfly’s lifespan and the RBI admitted in its State of the Economy that inflation would be “well above 6 percent”.

The state of the economy article also flags off the criticality of supply chain management to keep prices of perishables such as tomatoes in check. Tomatoes were behind the disconcerting surge in retail prices in June and July, a perishable whose weight (0.57 percent in vegetable index) is not big in the consumer price index (CPI) basket. The tone on inflation has turned more urgent and worrisome in the bulletin from the RBI. The central bank believes that there is a real risk from El Nino during the second half for the rabi output. It also points out that the cushion from international commodity prices cannot be taken for granted anymore. “There is a diminishing probability of crude price pressures easing over the rest of the year. This bodes ill for net energy importers like India,” the article said. The only counterbalancing factor is a tight monetary policy, the RBI says. Essentially, the RBI’s current forecast of 5.4 percent average inflation in FY24 is as safe as its past forecasts were.

Investors are getting butterflies in their stomachs now and the inflation data is not the only thing causing it. A lacklustre industrial output print (3.7 percent in June) and the simmering troubles from slowing advanced economies is making investors rethink the brightness of India’s growth. After all, if the economies that consume India’s exports do not grow, it is bound to be a drag on domestic production. Though the RBI too mentions these headwinds to growth, it continues to be optimistic. “Investors are ebullient about India’s growth prospects at a time when the rest of the world is slowing down,” the Bulletin states. There is no slack left in the economy, according to the RBI, as the output gap has closed. Most high frequency domestic data are in acceleration mode and could be enough to counter the gloom from across the border. The RBI’s growth forecast for FY24 stands at 6.5 percent while the International Monetary Fund (IMF) projects it at 6.1 percent.