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Business News/ Economy / ‘Inflation may cool, but risks remain’
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‘Inflation may cool, but risks remain’

India’s retail inflation accelerated to a three-month high of 6.52% in January, crossing the Reserve Bank of India’s upper tolerance band of 6% after a gap of two months.

The RBI’s monetary policy committee on 8 February hiked the repo rate for the sixth time by a smaller 25 basis points (bps) to 6.5%. (Mint)Premium
The RBI’s monetary policy committee on 8 February hiked the repo rate for the sixth time by a smaller 25 basis points (bps) to 6.5%. (Mint)

New Delhi: India’s headline inflation may soften going forward, but geopolitical conflicts and supply chain disruptions pose risks, the department of economic affairs said on Thursday. In its monthly review for January, the department said exports may also show tepid growth as India’s major export markets are forecast to decline sharply in 2023.

However, the government expects that measures announced in the Union budget will sustain growth and help address inflationary pressures.

“Inflation risks are likely to be lower for India in FY24. Still, they will not have vanished as global conditions such as geopolitical conflicts, and consequent supply disruptions that contributed to higher inflation in 2022 are still present," said the report.

Some meteorological agencies predict the return of El Nino conditions in India this year. “If these predictions are accurate, then monsoon rains could be deficient, leading to lower agricultural output and higher prices," it said.

Similarly, as with prices, external deficits may be a less of a challenge in FY24 than in FY23, but “close attention to trends in international trade and capital flows will be warranted," it said.Although most commodity prices have been easing since June 2022, in January 2023, they remained elevated compared to pre-pandemic levels, prolonging energy and food insecurity challenges. Crude oil prices have steadily declined from their mid-2022 peak but remain higher than pre-pandemic levels.As the wholesale price index based inflation declined to a 24-month low of 4.74% in January, the monthly economic review pointed out that this would also “soften" headline inflation going forward.

India’s retail inflation accelerated to a three-month high of 6.52% in January, crossing the Reserve Bank of India’s upper tolerance band of 6% after a gap of two months.

The RBI’s monetary policy committee on 8 February hiked the repo rate for the sixth time by a smaller 25 basis points (bps) to 6.5%.

Despite high inflation, the report said that the high frequency indicators for December and January indicate that the economy is on track to achieve 7% GDP growth in 2022-23.

Similarly, as with prices, the report said that external deficits may be a lesser challenge in FY24 than in FY23, however, close attention to trends in international trade and capital flows will be required.

“There is a likelihood of India’s exports showing tepid growth as the major export markets of India are forecast to decline sharply in 2023," he said.

Growth of global trade fell in 2022, “and is expected to be still lower in 2023 with a further decline in volume and value of trade on the back of slowing global output," the report said.

Despite the prospect of tepid export growth, the International Monetary Fund (IMF) and the World Bank project India to be the fastest-growing major economy in 2023, the report said.

The report highlighted that in this uncertain global environment, India’s Union Budget FY24 has ensured macroeconomic stability by budgeting a fiscal deficit of less than 6% of GDP. The Union finance minister Nirmala SItharaman in the budget pegged the gap between Centre’s revenue and expenditure for 2023-24 at 5.9% of gross domestic product.

The IMF projects India will grow at 6.1% in 2023 while the World Bank estimates the country’s growth for next year at 6.6%.

It said that the measures announced in the Union Budget FY24, such as a rise in capital expenditure, increased focus on infrastructure development, boost to the green economy, and initiatives for strengthening financial markets etc., are expected to promote job creation and spur economic growth.

Pointing at the 33% increase in capex allocation to 10 trillion, the report said that, ‘’By doing this, the government is continuing its push towards investment-driven growth amid global headwinds."

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Published: 24 Feb 2023, 12:51 AM IST
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