The balance of risks is increasingly tilted towards a darkening global outlook and emerging market economies (EMEs) appear to be more vulnerable, even though incoming data suggest that global inflation may have peaked, Reserve Bank of India officials led by Deputy Governor Michael D. Patra wrote in an article in the December edition of the RBI Bulletin.
Assessing the ‘State of the Economy’, they observed that the near-term growth outlook for the Indian economy was supported by domestic drivers as reflected in trends in high frequency indicators.
“Equity markets touched a string of new highs during November buoyed by strong portfolio flows to India. Headline inflation moderated by 90 basis points to 5.9% in November driven by a fall in vegetables prices even as core inflation remained steady at 6%,” they wrote in the article.
“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,” they added.
However, from a global perspective, while “inflation may be slightly down, but it is certainly not out. If anything, it has broadened and become stubborn, especially at its core,” they cautioned. “An unease hangs over energy prices: for now, OPEC plus stayed its hand in cutting production, but an oil price cap threatens to unleash disruptive financial forces, with hedge funds already cutting net long positions in crude contracts. Despite moderation in global commodity markets, climate change and the war in Ukraine are set to keep food prices at higher than pre-pandemic levels.”
Observing that major developed economy central banks appeared to be in “no mood to ease off in their fight against inflation”, they warned that “disinflation” was about to become painful.
“Financial conditions, and especially borrowing costs, are biting into discretionary consumer spending and housing demand, and stalling investment in new capacity creation. 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,” they noted.
On domestic developments, they said the OECD’s economic outlook released in November had noted that India was the only major economy that may register growth in excess of 5.5% during 2023 and 2024.
“Our Activity Index, constructed by extracting the common trend underlying from a set of 15 high frequency indicators in a Dynamic Factor Model (DFM), remained above pre-pandemic levels despite some sequential moderation,” they noted. “Accordingly, our latest nowcast places real GDP growth at 4.3% for Q3:2022-23,” they added.
“Despite a marginal dip in momentum, high frequency indicators suggest that underlying economic activity remains strong. PMI manufacturing and PMI services recorded strong expansion in November, aided by domestic demand and increase in new orders,” they further wrote.
Emphasising that business expectations in both manufacturing and services sectors remained at record levels, boosted by favourable underlying demand, and softening inflation, they said the RBI’s index of supply chain pressures remained below its historical average.
They said as India engages in setting out its priorities and deliverables under its G20 Presidency, “there is a sense that perhaps her time in the centre of the world’s stage has arrived”.
“As the third-largest economy in PPP terms, and the fifth-largest in terms of market exchange rates, India accounts for 3.6% of G20 GDP while its share in real (PPP) terms is much higher at 8.2%,” the officials observed.
“In 2023, India is projected to be among the fastest growing economies within G20. Our priorities under the G20 Presidency encapsulate a vision of unity and interconnectedness,” they added.
