India in 2023 better placed than most to face turmoil, says RBI report

'Core inflation in 2023 defies softening of input costs'

The Indian economy  in 2023 has remained resilient amidst high tides of uncertainty and is better positioned than many parts of the world to head into a challenging year ahead, the Reserve Bank of India (RBI) said in its State of the Economy report on Tuesday. “Even as global growth is set to slow down or even enter a recession in 2023…India has emerged from the pandemic years stronger than initially thought,” it said.

The report said a direct impact of the US banking crisis on India’s economic activity could be limited, but markets were bracing for tighter financial conditions. “This could present a trade-off between financial stability concerns and the conduct of disinflationary monetary policy.”

The report, however, raised inflation concerns. While the consumer price index (CPI)-based inflation softened marginally in February, it remained elevated, the report noted, adding that core inflation “continues to defy the distinct softening of input costs”.

The report also red-flagged a slowdown in private consumption. “Private consumption may edge down further, going by high-frequency indicators, including and perhaps mainly due to elevated inflation,” it said.
 

Retail inflation in February moderated to 6.44 per cent year-on-year, from 6.52 per cent in January. The moderation in headline inflation by 8 basis points (bps) between January and February was driven by a favourable base effect. Core inflation softened to 6.1 per cent in February from 6.2 per cent in the previous month.

CPI inflation has stayed above the RBI’s upper tolerance level of 6 per cent for nine of the 11 months in the current financial year, despite a 250-bp hike in the repo rate between since May 2022.
 

The RBI’s Monetary Policy Committee will review and announce its policy on April 6.

“Over the financial year ahead (2023- 24), inflation is expected to range tightly between 5.0 and 5.6 per cent if India survives an El Nino event adversely affecting the south west monsoon, given global uncertainties,” the report said.

On the growth front, the central bank has sounded more sanguine even if GDP growth slowed to 4.4 per cent for the October-December period. The report attributed the slowdown in Q3 to “unfavourable” base effects.

The report said the Q3 data offered “valuable information content” for the rest of the year. In particular, it pointed out further slowdown in private consumption.

The RBI’s nowcast model projects real GDP growth for the fourth quarter of FY23 at 5.3 per cent.

The report noted that growth impulses were getting further strengthened by easing of supply chain pressures and a rebound in services activity.