The monetary Policy report 2018 released by the Reserve Bank of India (RBI) provides detailed insights into the state of the economy.
On inflation, it shows that professional forecasters expect the retail inflation rate to fall in the coming months, averaging 4.1 per cent in Q2 and Q3, but rising to 4.5 per cent in Q4FY19 (Chart 1). This projection is largely in line with the RBI’s projections. And while the food inflation rate has moderated recently, the RBI finds that the recent trajectory of food inflation has been shaped by vegetables, fruit and pulses rather than cereals (Chart 2).
On the impact of rising crude oil prices, the RBI estimates that a 10 per cent increase in crude oil prices pushes the headline inflation rate up by 13 bps, imparts a 15bps “cost push” inflation and leads to a deterioration in the trade deficit, which via the currency leads to an additional 10 bps increase in the inflation rate (Chart 3). The flip side, though, is that higher oil prices reduce household spending on non-oil items, thereby reducing demand. And as firms are unable to pass on higher prices fully, higher oil prices reduce profits and investments, which in turn reduces aggregate demand, thereby lowering the inflation rate by 5-10 bps.
On growth, the professional forecasters expect GDP growth to fall from 8.2 per cent in Q1FY19 to 6.9 per cent in Q4FY19, recovering thereafter to 7.4 per cent in Q2FY20 (Chart 4). The RBI expects real GDP to grow at 7.6 per cent in FY20 (Chart 5).
And while private consumption has expanded, notwithstanding the subdued growth in rural wages (Chart 6), the contribution of government consumption to growth fell in Q1FY19 (Chart 7). Investment activity remains robust as reflected in indicators such as the import of capital goods as well as strong growth in housing loans (Chart 8), notes the report.
StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines; Source: Monetary Policy Report, October 2018