Inflation spilling over, private capex lacklustre: RBI Bulletin

Inflation is already biting into urban consumption demand and corporates’ earnings and capex and can undermine the prospects of the real economy, if it is not reined in, said an article in the November bulletin of the Reserve Bank of India (RBI), while asserting that festive demand has perked up growth hopes after ‘the slack in the second quarter’. 

The article on the State of the Economy, penned by several RBI officials, including Deputy Governor Michael Debabrata Patra, termed October’s 6.2% inflation print a ‘sticker shock’ reinforcing its concerns about becoming complacent in the wake of the sub-4% inflation prints in July and August.

“What is worrying is that apart from the sharp surge in the momentum of food prices, core inflation has edged up. There are early signs of second order effects or spill overs of high primary food prices – following the surge in prices of edible oils, inflation in respect of processed food prices is starting to see an uptick,” the article noted, also highlighting the rise in household services costs as a sign of higher living costs transmitting to wages.

“In this environment, the hardening of input costs across goods and services and their flow into selling prices needs to be watched carefully. If allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports,” it cautioned.

The slackening of the growth momentum in the second quarter, flagged by an article in the RBI bulletin last month, may be behind us, the latest article opined, but noted that private investment remains a problem.

“Private consumption is back to being the driver of domestic demand, although with mixed fortunes… Footfalls in malls may be low but e-commerce is burgeoning with a variety of marketing strategies… FMCG and auto companies have been stepping up ad spends to revive demand. Rural India is emerging as a gold mine for e-commerce companies in this festival season,” the article averred, adding that a healthy Kharif crop could bolster this further.

“Private investment is lacklustre as reflected in sequentially lower investment in fixed and non-current assets during July-September 2024 on account of subdued corporate earnings,” the article pointed out. Global growth, it reckoned, is expected to be stable but below par amid a “fragile confidence, and a possible lurch towards protectionism” which hinders a full-on global recovery. Anxieties run high about the possibility of adverse swings in trade and fiscal policies and the return of financial market volatility has stirred up old fears about hidden vulnerabilities and widened sovereign borrowing spreads for some emerging market and developing economies, it noted.