Economy gathering momentum in Q2, inflation remains concern, says RBI

Indian economy is gathering momentum in the second quarter, though inflation would continue to average above the central bank's comfort zone of 6 per cent, said an article in the RBI's monthly bulletin released on Thursday.

The consumer price index (CPI) based retail inflation shot up significantly to 7.44 per cent in July, from 4.87 per cent in the preceding month, mainly due to soaring prices of tomato, vegetables and other food items.

In his address to the nation on the Independence Day, Prime Minister Narendra Modi vowed to take more steps to contain price rise.

The uptick in inflation in its June reading mutated in July, with the unprecedented shock to tomato prices spilling over to prices of other vegetables, said the article on 'State of the Economy'.

"While core inflation witnessed a moderation, headline inflation is expected to average well above 6 per cent in the second quarter," it said.

The article has been authored by a team lead by Reserve Bank Deputy Governor Michael Debabrata Patra.

The central bank, however, said the views expressed in the article are of the authors and do not represent the views of the Reserve Bank of India.

The article further said that with industrial production and trade weakening, the global recovery is slowing after a robust first quarter performance.

"In this stressed global environment, the Indian economy is gathering momentum in the second quarter of 2023-24," it said.

Domestic drivers such as private consumption and fixed investment are offsetting the drag from the contraction in exports, it added.

RBI's rate setting panel, Monetary Policy Committee (MPC), has retained its forecast of economic growth at 6.5 per cent for 2023-24, noting that domestic economic activity is holding up well, supported by domestic demand in spite of the drag from weak external demand.

It also revised upwards its projection of inflation taking into account the recent price surges in the food category of the CPI.

The main revisions relate to the projections for the second and third quarters, with the forecast for the fourth quarter unchanged.

According to the article, high frequency food price data for August so far (up to 14th) show that prices of cereals and pulses continued to increase in August.

Edible oil prices continued to decline in July-August. Tomato prices, on an average, registered a further increase in August so far, although more recent data indicate some pullback in prices. Onion and potato prices also registered sequential upticks.