Indian cenbank says aligning inflation with 4% target far from assured

By Swati Bhat

MUMBAI (Reuters) – The Indian central bank’s objective of aligning inflation with its 4% target on a durable basis is far from assured and a failure to do so could risk economic growth, the bank said in its latest bulletin published on Wednesday.

“On a real-time basis, inflation is hurting discretionary consumer spending and this, in turn, is holding back topline growth of manufacturing companies as well as their capex,” the Reserve Bank of India (RBI) said in its ‘State of the Economy’ article.

“If inflation is not brought back to the target and tethered there, there is a strong likelihood that growth may falter.”

Annual retail inflation rose to 5.55% in November from 4.87% in the previous month due to higher food prices, the latest data showed.

Projections indicated that inflation will go up further from the September-October 2023 average inflation rate of 4.9% before it can come down, the RBI said.

The article also added that softer inflation data has engendered a “hypermetropia” among some stakeholders – an irrational long-sightedness where inflation forecasts gravitating towards the 4% target in the distant future are clearly sighted while near-term spikes due to food price volatility are blurred.

The RBI reiterated the need to remain vigilant and ready to act as per the evolving outlook.

On the growth front, however, the central bank sounded a tone of cautious optimism and said internal models indicated that growth is likely to be sustained in H2:2023-24 and 2024-25 despite some moderation.

Evidence from high-frequency indicators points towards sustained strength in demand conditions, the central bank said.

The pace of global growth may slow further in 2024 while disinflation at varying paces in different geographies may pave the way for interest rate reductions, it added.

“In India, the broad-based strengthening of economic activity that is underway will likely be sustained by easing input costs and corporate profitability.”

(Reporting by Swati Bhat; Editing by Janane Venkatraman)