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Even as “inflationary pressures” have moderated, there are persistent downside risks to growth and macroeconomic stability from inflation which continues to keep the government and the Reserve Bank of India (RBI) on “high alert”, Ministry of Finance said in its latest monthly economic review for October 2023.
The Ministry also said that a fuller transmission of the monetary policy, which essentially means pass-through of the central bank’s rate hikes to consumers by banks, may also temper domestic demand.
“With more than half of the current financial year witnessing positive developments in the economy, the full financial year should conclude as projected with a strong growth performance and macroeconomic stability. Yet risks on the downside persist. Inflation is one of them that has kept both the government and the RBI on high alert. Financial flows in the external sector also need constant monitoring as they impact the value of rupee and the balance of payments. A fuller transmission of the monetary policy may also temper domestic demand,” the report said.
Headline retail inflation had slipped to a four-month low of 4.87 per cent in October. However, inflation concerns continue to persist. Last week, RBI in its monthly bulletin had said that while festival demand remains “ebullient” and consumer sentiment is “upbeat”, India has “miles to go” and is “not out of the woods yet” on inflation.
Also, the Ministry pointed out that transmission of the monetary policy tightening “may be beginning to take effect”, which may impact domestic demand. “Against a cumulative hike of 250 basis points (bps) in policy repo rate, lending rates have increased by 187 bps in respect of fresh loans and 105 bps in respect of outstanding loans,” it said.
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At the same time, the Ministry said the festive season has “further strengthened consumption demand”. “While accumulated savings and declining rates of unemployment constitute the underlying strength of consumption demand, the wealth effect emanating from rising real estate prices and growing capitalisation of equity markets may have also strengthened consumption,” it said. The Ministry also emphasised that the central government is on track to achieve the budgeted fiscal deficit target for the current financial year supported by buoyancy in revenue mop-up and prudent expenditure management.
“Continued buoyancy in revenue collections supported by prudent expenditure management has enabled the fiscal deficit to be contained within 40 per cent of the Budget Estimate during the first half of the year. The government’s emphasis on capital expenditure has continued during the year as well, imparting an impetus to private investment. The recent steep and rapid decline in global crude oil prices removes an important source of potential impact on public finances as well,” it said. On the growth front, the ministry said India’s growth experience in 2023-24 should continue to be a positive outlier as compared to other major economies.
“The government’s sustained investment push, healthy corporate profits, and a reduction in bank non-performing loans will likely keep investment buoyant despite elevated input costs. India’s exports are also expected to perform well, driven by strong performance in services exports,” it said.
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