India’s economic prospects brighten; core inflation, global volatility may pose risks: RBI financial stability report

INTERNATIONAL DESK: The rising pace of local economic activities along with stronger corporate sector balance sheets and efficient financial system has brightened the prospects of the Indian economy while the persistent core inflation above 5% and a potential volatility in the global financial system could pose risks to the growth trajectory, the Reserve Bank of India said in its financial stability report.

“The Indian economy presents a picture of resilience, supported by strong macroeconomic fundamentals. Sustained growth momentum, moderating inflation and anchoring of inflation expectations, a narrowing current account deficit and rising foreign exchange reserves, ongoing fiscal consolidation and a robust financial system are setting the economy on a path of sustained growth,” RBI said.

Headline inflation measured by Consumer Price Index has gradually moderated to 4.25% in May from its peak of 7.8% in April last year, owing to monetary tightening and removal of supply side bottlenecks locally as well as globally. Current account deficit in the January-March quarter narrowed to $1.3 billion, which is 0.2% of the GDP while forex reserves are now closer to $600 billion.

The world’s fifth largest economy is positioned to be among the fastest growing major economies despite multiple global headwinds.

The central bank also said that the growth momentum is building up with the strengthening of domestic demand conditions, strong public investment in infrastructure and smooth funding of the financing needs of businesses
and households.

“The Indian financial system, led by a sound banking system, remains stable and supportive of the productive needs of the economy… Indian banks
are well positioned to sustain the upturn in the credit cycle that has been underway since early 2022,” RBI said.

While domestic demand revived, increasing capacity utilisation in the manufacturing sector and easing input cost pressures are positives for the corporate sector, which is seen drawing more funds from the banks and non-banks for productive purposes. This is despite tighter domestic liquidity conditions with gradual withdrawal of monetary accommodation and a higher interest outgo due to a cumulative 250 basis points rise in policy repo rate since May last year.

The Indian economy is projected to grow at 6.5% during 2023-24, the fastest in the world. The GDP grew by 5.3% in the second half of FY23 well supported by both private and government consumption demand, rising investment and improving consumer and business optimism.

However, the escalating geopolitical tensions raises serious concerns about the fragmentation of the global economy and the financial system. While timely interventions have calmed global financial markets after the bank failures in the US and in Europe, uncertainty about the global economic outlook has risen and
the balance of risks has tilted to the downside, RBI said.

Locally, moderation in real wages and recent signs of tempering of private consumption are emerging as constraining factors, alongside weakening external demand, which may impact export prospects, the central bank cautioned. (ET)