While data suggest global inflation may have peaked, the risk has not faded away and emerging market economies (EMEs) appear to be more vulnerable, said the Reserve Bank of India (RBI) in the December 2022 issue of its monthly Bulletin, released on December 20.
The RBI said inflation would likely moderate in 2023 from current levels, but it would remain well above targets in most economies.
The RBI bulletin is a monthly publication with a collection of articles, speeches and current statistics that highlight the trends in domestic and global economies.
"With every passing day, the balance of risks gets increasingly tilted towards a darkening global outlook for 2023, the year that will bear the brunt of monetary policy actions of this year. Emerging market economies (EMEs) appear to be more vulnerable, even though incoming data suggest that global inflation may have peaked," said the RBI.
The central bank, however, underscored that the current growth momentum in the Indian economy is likely to sustain because of easing input costs pressures, upbeat corporate sales and growing investments in fixed assets.
"The near-term growth outlook for the Indian economy is supported by domestic drivers as reflected in trends in high-frequency indicators. Waning input cost pressures, still buoyant corporate sales and turn-up in investments in fixed assets are heralding the beginning of an upturn in the Capex cycle in India which will contribute to a speeding up of growth momentum in the Indian economy," said the RBI.
"High-frequency indicators suggest that domestic economic activity remained resilient in November and early December. The outlook for private consumption and investment are looking up, although relatively higher inflation in rural areas is muting spending in those regions," the central bank added.
Headline inflation moderated by 90 basis points to 5.9 percent in November, primarily due to a fall in vegetable prices even as core inflation, as per the RBI, remained steady at 6 percent.
The RBI said while successive supply shocks gave rise to initial inflationary pressure, a revenge rebound in spending along with other factors is making them persistent.
It said inflation might be slightly down, but it is certainly not out. If anything, it has broadened and become stubborn, especially at its core.
"The initial inflationary pressure was delivered by successive supply shocks but as their impact waned, a revenge rebound in spending and especially a swing from goods to contact-intensive services is generalising price pressures and making them persistent," said the RBI.
"The contribution of cyclically sensitive components of headline inflation seems to be rising in recent months, indicating demand pressures," said the central bank.
The central bank observed that debt distress is rising, with a surge in default rates and an appreciating US dollar – the principal currency in which debt is denominated – although more recently it has tumbled down from 20-year highs.
RBI expects a mild recovery to begin in most countries in 2024 and it believes emerging Asia will likely become the world’s engine of growth, collectively accounting for close to three-quarters of global growth in 2023 and around three-fifths in 2024.
In its last policy meet on December 7, the RBI MPC increased the policy repo rate by 35 basis points to 6.25 percent.
RBI Governor Shaktikanta Das said real GDP growth for 2022-23 is projected at 6.8 percent, with Q3 at 4.4 percent and Q4 at 4.2 percent. Real GDP growth is projected at 7.1 percent for Q1FY24 and at 5.9 percent for Q2.
RBI projected headline inflation at 6.7 percent in FY23, with Q3 at 6.6 percent and Q4 at 5.9 percent. CPI inflation for Q1FY24 is projected at 5 percent and for Q2 at 5.4 percent, on the assumption of a normal monsoon.
