Aggregate demand in India is poised to shrug off the temporary slowdown in momentum in the second quarter of 2024-25 as festival demand picks up pace and consumer confidence improves, Reserve Bank of India (RBI) said in its monthly bulletin for October 2024.
“Rural demand is expected to get a boost from the improved agricultural outlook. Private investment should pick up steam in response to signs of pick-up in consumption demand and rising business optimism. With the financial sector ready to intermediate resources for productive investment, buffered by healthy balance sheets, and the government’s continued thrust on capex, the investment outlook appears bright…although escalation of geopolitical tensions remains a potential threat,” Reserve Bank of India (RBI) said in state of economy article which counts deputy governor Michael Patra as one of the authors.
Uncertainty surrounding global economic prospects could persist in the near term with heightened geopolitical tensions in the Middle East. “Increase in commodity prices, especially of crude oil and metals, raise pass-through risks for net importer countries. The future course of monetary policy the world over would, therefore have to take into account the risks to both growth and inflation from recent commodity price shocks. The response of the Chinese economy to the stimulus measures announced also remains unclear, complicating the outlook for the global economy,” the state of the economy report said. Views expressed in the bulletin are those of the authors and do not represent the views of the RBI.The last mile of disinflation is contingent upon reining in food inflation and checking its spill over impact on inflation expectations and core inflation, RBI said in the monthly document. Geopolitical conflicts, uncertain global outlook, volatile global financial markets, and climate shocks remain key risks to the growth and inflation outlook. Headline inflation is on a downward trajectory and is expected to moderate further in 2024-25, though the pace may be slow and uneven, the report said.
“Looking ahead, evolving food inflation dynamics will impinge upon the outlook for inflation. The above normal south-west monsoon rainfall, significantly higher reservoir levels as compared to decadal average and higher kharif sowing vis-a-vis last year bode well for the inflation outlook. Nevertheless, rising global supply chain pressures, adverse weather events, uneven distribution of rainfall; prolonged geopolitical conflicts and resultant supply disruptions; recent uptick in food and metal prices; volatility of crude oil prices; and adverse weather events,” RBI said.
Above normal rainfall augurs well for overall kharif production in the country as well as for reservoir storage, which brightens the rabi season outlook but the possibility of excessive rainfall damaging the standing kharif crops remains a risk.
“The Reserve Bank will continue to be nimble and flexible in its liquidity management operations and will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity so as to ensure that interest rates evolve in an orderly manner,” the report said.
