Global Economy

RBI economists call for higher private investments, warn rising food prices could derail disinflation process

Private investments will need to go up to drive growth while disinflationary stance will continue to take care of the spillover effects of high food prices which in turn could delay the rate cycle even if the headline CPI touches the target level indicated an assessment of the state of the economy by the Reserve Bank of India economists.

At the same time, they have called for a strong revival of private investments in the economy which has for long been supported by government spending. “A strong revival in private investment has to become the most important factor driving growth in the years to come, especially as public finances consolidate” said an assessment of the state of the economy by RBI deputy governor Michael Patra and his team, published in the latest Reserve Bank of India Bulletin. The views are not necessarily that of the central bank.

Government consumption spending picked up modestly towards the close of 2023-24, reflecting the sustained focus on capital expenditure which is a positive for the medium-term prospects of the economy and investor sentiment, according to the report. The Real GDP is estimated at 8.2 percent in 2023-24 compared to 7 percent in 2022-23.

More recent indicators suggest that private consumption is resuming its role as the main driver of demand and is getting broad-based to include rural consumers. The fast moving consumer goods sector is gearing up for a strong turnaround on expectations of pick-up in public welfare spending.

A drop in walk-in clientele is being compensated for by e-commerce platforms, especially in heatwave conditions, said the report. Investment has maintained steady growth though some moderation in the more recent period could be on account of transitory uncertainty weighing on investment decisions, the authors said.

As for inflation, although headline inflation is gradually easing, driven by softening of core inflation which headline excluding food and fuel, “ the path of disinflation is interrupted by volatile and elevated food inflation which may cause it to reverse after a temporary fall below the target (of 4 percent) during the second quarter of 2024-25” the assessment said. This implies that the MPC might not consider a reduction in policy rate even if inflation touches the target level of 4 percent unless the target is sustained on a durable basis. The Reserve Bank had kept the policy rate untouched at its June 6th meeting. “Consequently, a resolute commitment to a durable alignment of headline inflation with the target will warrant careful monitoring of spillovers from food price pressures to core inflation and inflation expectations. This necessitates a continuation of the disinflationary stance.” the authors said.


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