Domestic economic conditions so far have sustained the quickening of momentum seen in the last quarter of FY23, according to the RBI’s latest monthly bulletin.

Though the Indian economy, which was scarred and scathed by the pandemic and the war is slowly but surely recovering, there is no room for complacency, per an article titled ‘State of the Economy’.

“An environment of low and stable prices is necessary for strengthening the foundations and resilience of this recovery. Eternal vigil with a readiness to act is its price.

The Reserve Bank of India’s economic activity index (EAI) has nowcast GDP growth for Q1 (April-June) FY24 at 7.6 per cent, against real GDP growth of 7.8 per cent projected in the April 2023 Bi-monthly Monetary Policy Statement.

The nowcast GDP growth is based on partial data available for April 2023 and assuming an implied GDP growth of 5.1 per cent for Q4 (January-March) FY23, per the article.

“The Indian economy has sustained the momentum in FY24 so far. The index of supply chain pressure for India (ISPI) continued to remain at levels below historical average since July 2022

“Overall economic activity, as captured by our economic activity index (EAI), remains resilient,” according to the article put together by RBI economists.

GDP growth

The economists noted that GDP growth in the first quarter of FY24 is expected to be driven by private consumption, supported by revival in rural demand that is underway, on the back of the encouraging developments in both the kharif marketing season of FY23 and the rabi marketing season of FY24, sustained buoyancy in services, especially contact-intensive sectors, and moderating inflationary pressures.

Investment activity is also expected to improve, drawing strength from the thrust on capital expenditure in public spending and moderation in commodity prices. Moreover, with capacity utilisation in manufacturing straining at trend levels and above it in some industries, private capital spending will need to get stronger to add additional capacity as demand picks up.

The authors assessed that the manufacturing sector as a whole is expected to gain from softening input cost pressures.

“If services exports maintain their recent high profile, the drag from net external demand should moderate through April-June 2023.

“Domestic service sector activity will continue to be led by the rebound in contact-intensive services and the resilience in construction activity,” they said.

Inflation

The authors observed that the April 2023 CPI inflation print, which moderated sharply to 4.7 per cent in April 2023 from 5.7 per cent in March, indicates that momentum is turning out to be softer than anticipated on account of a fall in wheat prices, the fifth consecutive monthly decline in prices of oils and fats, and the third consecutive monthly decline in the prices of eggs.

The prices of vegetables and fruits are also weathering the summer heat better and their momentum is lower than their historical record for this time of the year.

Kerosene prices are on the decline and importantly, core inflation – CPI excluding food and fuel – is treading on softer momentum (seasonally adjusted) relative to the persistent elevation over the past 10 months.

“Rice prices could see a significant correction if sales from buffer stocks, which are three times larger than the norm, are undertaken.

“The passthrough of wholesale price movements – in deflation in April – could also contribute to the softening of retail inflation going forward,” the authors said.