According to Reserve Bank of India (RBI) officials, economic activity in India remains resilient and set to expand further, although aggressive and internationally synchronous monetary tightening has further weakened global economic prospects.
This was due to a pick-up in domestic demand as contact-intensive sectors were facing a boom, officials – led by Deputy Governor Michael D. Patra – wrote in an article in the latest issue of the RBI’s monthly bulletin.
“Strong credit growth and strong corporate and bank balance sheets provide further strength to the economy. Headline inflation is set to moderate from September highs, albeit due to stubborn momentum and favorable base effects,” he said in an article titled ‘State of the Economy’.
He said that these factors will affect India’s prospects as one of the fastest growing economies in the world.
“In the uncertain and fragile global economic environment, the Indian economy showed resilience. Indicators of aggregate demand indicate that the onset of the festive season and moderation in demand kept the growth strong,” the authors said.
“Our economic activity index which employs a dynamic factor model (DFM) with 27 high frequency indicators now shows GDP growth for Q2: 2022-23 at 6.4%. Many high frequency indicators remain upbeat,” he said.
Analyzing various aspects of the economy, he said that looking ahead, India was poised to consolidate and accelerate reforms for the rest of the year.
“The pace of real GDP growth is expected to offset the inherent drag in the NSO [National Statistics Office] Estimates for the first quarter of 2022-23 and the remaining quarters move into positive territory, including on a seasonally adjusted basis,” he said.
“While this may not be evident in the year-on-year growth rate due to adverse base effects, QoQ annual rates will reflect the underlying recovery,” the officials said.
Emphasizing that the contact-intensive sectors will have the potential for rejuvenation as the containment was reduced due to the pandemic, he said that festival-related spending is already in place for other components of domestic demand with positive externalities on consumption demand. was increasing.
A reduction in international price pressures embodied in commodity and supply-chain pressures is likely to soften costs and prices, he said.
“While the continuation of headline CPI inflation above the tolerance band for three consecutive quarters (till September) will trigger mandatory accountability processes, monetary policy remains focused on re-aligning inflation with the target,” he said.
He said the reduction in inflation will instill confidence in both consumers and businesses, recharge animal spirits and investments, and improve the international competitiveness of India’s exports.
However, he added, “the fight against inflation will be longer and longer, given that monetary policy is driven by, and fraught with, uncertainties. Still, if we are successful, we will be one of the fastest growing economies in the world.” India as one of the prospects is enjoying negative inflation gap with the rest of the world.
“This pleasant outcome will re-energise foreign investors, stabilize markets and secure financial stability on a sustainable basis,” he said.