Inflation needs to align with target by 2nd quarter: RBI monthly bulletin

Report says priority for FY25 is to sustain growth momentum of at least 7%

India should sustain the strong growth momentum in the next financial year by securing at least a 7 per cent expansion in GDP while the headline inflation needs to align with the target of 4 per cent by the second quarter of FY25, as projected, said the Reserve Bank of India’s (RBI’s) state of the economy report issued on Thursday. The report said the “potential output is picking up with actual output running above it, although the gap is moderate,” indicating there is no overheating in the economy.

“…the virtuous thrust to investment from government capex must be partnered and even led by the corporate sector, supplemented by foreign direct investment,” said the report, authored by RBI staffers including deputy governor Michael Patra. The report does not represent the views of the central bank.

On the December inflation data which edged up to 5.7 per cent from 5.6 per cent in November, the report noted it was mainly due to an unfavourable base effect of around 50 basis points (bps), which more than offset a negative price momentum of around 30 bps.

“The negative momentum in overall CPI was on account of a month-on-month decline in food prices by 73 bps,” it said.

Importantly, the report observed that the core inflation moderated to 3.8 per cent in December, its lowest print in more than 4 years, from 4.1 per cent in November. Commenting on the National Statistical Office’s (NSO’s) first advance estimates which projected the Indian economy to grow at 7.3 per cent in 2023-2024, the report said the stronger-than-expected growth was underpinned by a shift from consumption to investment, with the government’s thrust on capex starting to crowd-in private investment as high corporate profitability quarter after quarter has begun to induce the creation of fixed assets.

In this context, the report noted, the housing market is seeing its highest sales in more than a decade and real estate is exhibiting remarkable resilience and adaptability. “Anecdotal evidence points to home renters becoming owners of bigger homes – a development that is widely expected to become a trend,” it said, adding the rate of real fixed investment is at a historic high in 2023-24 which augurs well for enhancing the productive capacity of the economy.

The report said that the global economy has displayed extraordinary resilience amid enduring wars, tight financial conditions and havoc-wreaking climate change. Economies across the world are adapting better than expected and this provides a strong bedrock for the year ahead, it said.

“…projections are being consistently proved pessimistic by incoming data. Projections of global growth that are currently converging well below 3 per cent for 2024 may once again be belied on the upside,” it said.

Highlighting food and energy prices on the ebb — crude prices fell in spite of production cuts — the genie of inflation is being bottled. 

India emerging global leader in GCC

The RBI’s state of the economy report observed that India is rapidly emerging as a global leader in hosting global capability centres (GCCs).

GCCs offshore units of multinational corporations that operate across the globe, responsible for providing various support services.

Share of GCCs in the total office real estate transactions rose to 35 per cent in 2023. It is estimated that by 2025, India will have 1,900 GCCs with a market size of $60 billion.

“The primary catalyst is the preference global corporations have towards owning their resources and locating them in India, which boasts quality real estate, competitive rental rates, an extraordinary talent pool, and a consistently growing economy,” it said.

Another comparative advantage for India is surging data centre capacity, which is poised to exceed one gigawatt by 2024 and position the country as a global data centre hub.

“This development has positive implications for foreign direct investment which has started turning around in the second half of 2023-24 and is flowing increasingly into business services,” it added.