The Reserve Bank of India (RBI) has released its August 2023 bulletin, highlighting the inflation outlook and the current economic situation. While core inflation has moderated, the RBI predicts that headline inflation will average above 6% in the second quarter of FY24. This is attributed to the unprecedented shock to tomato prices, which has affected the pricing of other vegetables and led to an increase in inflation from June to July.
Reserve Bank of India Governor Shaktikanta Das, in the bulletin, stated that despite reaching a low of 4.3% in May 2023, headline it rose in June and is expected to surge further in July and August, mainly driven by vegetable prices. While the impact of the vegetable price shock might reverse quickly, potential El Niño weather conditions and global food prices are factors that need to be closely monitored, especially in the context of an uneven south-west monsoon.
The bulletin also discussed the global economic recovery, noting that despite a strong first quarter, the global recovery is sluggish due to weaker industrial production and trade. However, the Indian economy is starting to show signs of picking up momentum in this challenging global environment. Private consumption and fixed investment are serving as domestic drivers, offsetting the decline in exports.
The Reserve Bank of India predicts that the surge in vegetable costs, particularly due to tomato prices, will exert significant upward pressure on near-term inflation. However, it is anticipated that this increase will likely level out with the entry of new market players. The bulletin projects CPI inflation at 5.4% for 2023-24, with Q2 at 6.2%, Q3 at 5.7%, and Q4 at 5.2%. The risks to inflation are evenly balanced.
Despite the recent spike in food inflation and the US Federal Reserve’s rate hike in July, the RBI chose to keep policy rates unchanged. In line with the “Withdrawal Of Accommodation” policy stance, the MPC unanimously decided to maintain the repo rate at 6.50%. Governor Shaktikanta Das emphasized the RBI’s commitment to achieving the inflation target of 4%, even as the global economic challenges continue.
