Inflationary Tensions Expected to Linger in Upcoming Months, Caution Urged by Finance Ministry.
The finance ministry has issued a cautionary note, indicating that the persistent pressures of inflation might endure for the following months, necessitating heightened vigilance from both the Reserve Bank of India (RBI) and the government.
As the economy progresses, internal consumption and investment demand are projected to retain their roles as growth drivers. However, the interplay of global uncertainties and domestic disruptions casts a shadow over the inflation outlook in the coming months. The finance ministry’s Monthly Economy Review report for July, unveiled on August 22, underscores the importance of enhanced watchfulness from both the government and the RBI.
These comments from the financial realm follow closely in the wake of recent data revealing a surprising surge in vegetable prices, propelling India’s headline retail inflation to a 15-month peak of 7.44 percent in July, compared to 4.87 percent just a month earlier. This unanticipated uptick in Consumer Price Index (CPI) inflation compelled swift action from the government to curb the ascent of essential food prices. Notably, a 40 percent export duty on onions was introduced on August 19 to discourage exports and guarantee a sufficient domestic supply.
Experts foresee CPI inflation to hover above the 7 percent mark in August, although there are some indications of easing prices. The government has even initiated the sale of tomatoes at reduced prices in major consumption centres. Nevertheless, the expectation is for inflation to decline markedly in anticipation of the festive season, with some economists predicting a sub-5 percent rate by October.
Yet, prior to this projected decline, price hikes are predicted to exceed previous forecasts. On August 10, despite the Monetary Policy Committee (MPC) maintaining the policy repo rate at 6.5 percent for the third consecutive meeting, the RBI elevated its inflation projection for July-September by a substantial 100 basis points to 6.2 percent.
However, the inflation forecast adjustment proved to be outdated in light of the July inflation figures released on August 14. An article penned by RBI staff on August 17 indicated that inflation was now expected to average “well above 6 percent” in the July-September period.
The finance ministry’s monthly report added a hopeful perspective on the situation, stating that the recent price surges in specific food items were likely to be transient. It anticipates a decline in tomato prices with the influx of fresh stocks by the close of August or early September. Additionally, augmented imports of tur dal are foreseen to temper the inflation in pulses. These factors, along with the ongoing efforts of the government, are poised to usher in moderation in food inflation in the months ahead.
The finance ministry also emphasized the need to monitor the external sector to bolster India’s merchandise exports in the face of subdued global demand. Although services exports are projected to continue thriving, geopolitical and geo-economic concerns are anticipated to persist, underlining the importance of maintaining macroeconomic stability. This stability is essential to prevent excessive increases in interest rates, reinforce India’s appeal as a domain of performance and promise for both domestic and international investors, and sustain a steady trajectory of economic growth.