With the stable downward movement in core inflation and moderation in food prices, economists in the Finance Ministry said that the outlook for a reasonably low headline inflation rate is good.
The outlook for the Indian economy appears ‘bright’ with GDP likely to grow by 7% next financial year beginning April 1 from an estimated 7.3% in the current financial year, the economists led by Chief Economic Adviser V. Anantha Nageswaran said.
However, they cautioned that policymakers need to keep a watch on global headwinds emanating from geopolitical tensions and volatility in international financial markets.
Retail inflation declined to a three-month low of 5.1 per cent in January 2024. According to the latest release of inflation data, month-on-month momentum in price indices of vegetables, pulses and overall food items was – 4.2%, – 0.9% and – 0.7%, respectively.
“Hence, it is expected that food inflation will moderate further in the upcoming months,” the economists said in the finance ministry’s monthly report for January. RBI has revised the inflation projection for Q4 of FY24 downward to 5% in the Monetary Policy Statement of February 2024, from 5.2% in the previous MPC meeting. RBI has also kept the policy rate unchanged at 6.5% to facilitate full monetary transmission.
Overall, inflationary pressures moderated in the first 10 months of FY24, with retail inflation easing to 5.4%, compared to 6.8% in the same period of FY23. Core inflation continued to decline for the eighth consecutive month, from 5.2% in May 2023 to 3.5% in January 2024.
Prospects of healthy rabi harvesting, sustained manufacturing profitability and underlying service resilience are expected to support economic activity in FY25, they said.
“On the demand side, household consumption is expected to improve, while prospects for capital formation are bright owing to an upturn in the private capex cycle, improved business sentiments, healthy balance sheets of banks and corporates, and the government’s continued thrust on capital expenditure,” the report noted.
Improvement in the outlook for global trade and rising integration in the global supply chain will support net external demand. However, headwinds from geopolitical tensions, such as supply chain disruptions and higher logistics costs, volatility in international financial markets, and geoeconomic fragmentation, pose downside risks, they added.