The Indian economy appears poised to regain momentum (on a quarter-on-quarter basis) in the second quarter of 2023-24 after a dip that typically characterises the first quarter, according to RBI’s latest monthly bulletin.
The headline inflation is expected to average well above 6 per cent in the second quarter, it added.
“High frequency indicators for July provide the foundations for our view that this pick-up in momentum should counterbalance unfavourable base effects.
“The indicators are mostly in the green i.e., in acceleration, that is being driven by domestic drivers such as private consumption and fixed investment, offsetting the drag from the contraction in exports,” per an article “State of the Economy” in the bulletin.
GDP growth
RBI’s economic activity index (EAI) nowcasts GDP growth for Q1:2023-24 at 7.8 per cent.
On balance, the officials’ assessment of the Indian economy in terms of its position in the business cycle is that the slack imposed by the pandemic has been pulled in.
“The output gap, which was mostly negative since the fourth quarter of 2019-20, has turned positive during January-March 2023. Investors are ebullient about India’s growth prospects at a time when the rest of the world is slowing down,” they said.
Incidence of supply shocks not over
Senior RBI officials, who put together the article, observed that the vulnerability of the economy to recurring incidence of vegetable price shocks, especially ahead of and during the monsoon, warrants major reforms in perishable supply chains covering transportation networks, warehousing and storage technologies, and value addition processes that damp the amplitude of these swings.
The authors noted that the uptick in inflation in its June reading mutated in July, with the unprecedented shock to tomato prices spilling over to prices of other vegetables.
In the event, headline inflation surged to a 15-month high in July (7.4 per cent) from 4.9 per cent in June 2023
The month-on-month increase in food prices was about 570 basis points (bps), at about 180 bps in fuel prices, and about 35 bps in the core group (i.e., excluding food and fuel).
Notably, however, core inflation eased in July to 4.9 per cent from 5.2 per cent in June, extending a softening bias that set in from February 2023.
“The incidence of supply shocks is not over - elevation in vegetable prices has extended into the first half of August. Accordingly, headline inflation is expected to average well above 6 per cent in the second quarter,” per the article.
The officials said high frequency food price data for August so far (up to 14th) show that prices of cereals and pulses continued to increase in August. Edible oil prices continued to decline in July-August.
Tomato prices, on an average, registered a further increase in August so far, although more recent data indicate some pullback in prices. Onion and potato prices also registered sequential upticks.
Shadow of El Nino
The authors said the shadow of El Nino looms over the second half of the year and the outcome for food inflation in the rabi season.
“Yet another upside risk is the outlook on crude oil prices that is marred by ‘engineered’ supply shortfalls. 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 officials cautioned.