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In his speech on the Monetary Policy recently, the RBI governor Shaktikanta Das announced that the projected GDP growth of India in FY22 will remain unchanged at 9.5 percent. The projected inflation rate for FY22 has been increased to 5.7 percent.
The governor said in his speech that “the economy is recovering from the setback of the second wave” and that there has been “encouraging movement in high-frequency indicators. The governor did note that inflation was higher than expected in May and June, but also added that “these [inflationary] pressures are transitory and largely driven by adverse supply-side factors.”
Low GDP Growth of India Due To Third Wave Risk, Global Market Volatility
According to the RBI, global financial volatility and the risk of new waves of infections are downside risks to economic activity. That is why the real GDP growth of India is retained at 9.5% in FY 2021-22. Quarter-wise breakdown of projected growth is as follows: 21.4 percent in Q1; 7.3 percent in Q2; 6.3 percent in Q3; and 6.1 percent in Q4 of 2021-22. For FY 2022-23, the real GDP growth of India is projected at 17.2 percent.
Domestic economic activity has started normalizing with the ebbing of the second wave of the virus and the phased reopening of the economy, the governor said. High-frequency indicators suggest that consumption, investment, and external demand are all gaining traction.
General Outlook on Growth Indicators
Private consumption is expected to grow as a consequence of the ease of restrictions and vaccination. The RBI particularly expects a boost in recreational spending including travel and tourism. Rural demand and the robust outlook for agriculture will support private consumption. Recovery in manufacturing is expected to help spark urban demand as well. According to early financial results, the RBI governor announced, corporates are also showing healthy growth in sales, wages, and profitability, led primarily by IT firms.
In terms of investments, a revival is expected based on “improving capacity utilization, rising steel consumption, higher imports of capital goods, congenial monetary and financial conditions and the economic packages announced by the Central Government.” In his speech, the RBI governor also mentioned that strong external demand is an opportunity, and Indian policy support should focus on capitalizing on this opportunity.
Inflation Rise Due To Supply Shocks Is Temporary
Inflation measured by the Consumer Price Index (CPI) rose to 6.3% in May this year and remained at that rate in June. CPI inflation is projected at 5.7 percent during FY 2021-22: 5.9 percent in Q2; 5.3 percent in Q3; and 5.8 percent in Q4 of 2021-22. CPI inflation for Q1:2022-23 is projected at 5.1 percent.
According to the RBI governor, the rise in inflation reflects “a combination of adverse supply shocks, elevated logistics costs, high global commodity prices and domestic fuel taxes.” The governor emphasized that the recent inflation is largely driven by supply-side issues due to the pandemic. Hence, as supply constraints are eased, inflation levels are expected to come back down.
Factors That Will Influence Inflation Rates
The southwest monsoon is expected to lead to a rise in the sowing of kharif crops. This is expected to help contain cereal prices from rising sharply. The RBI governor also claimed that supply-side interventions by the government could help keep the prices of edible oils and pulses in check.
Inflation in house rentals remains below historical averages, reflecting that demand in the real-estate sector has declined. The governor attributed the sharp rise in core inflation to an increase in higher manufacturing costs, which are attributable to an increase in prices of industrial raw materials, petrol and diesel.
Overall, the RBI governor said that even though there is optimism regarding vaccination and a more subdued third-wave, economic recovery across sectors will require policy interventions. “The Reserve Bank remains in ‘whatever it takes’ mode, with a readiness to deploy all its policy levers – monetary, prudential or regulatory.” the governor said.