Supply-side stress, weather add uncertainty to macros

India’s near-term economic outlook is clouded by supply-side pressures and weather-related uncertainties, while the potential second-round effects of geopolitical uncertainties in West Asia on domestic prices need careful monitoring, the Reserve Bank of India said in its monthly state of economy report.

“India has entered this phase from a position of macroeconomic strength. Domestic demand continues to be the key driver of growth. However, the near-term outlook is somewhat clouded by supply-side pressures,” the report prepared by the central bank researchers observed.

They expressed caution on the likelihood of the pass-through to domestic prices. “Although headline inflation remains firmly within the tolerance band, the pass-through to domestic prices needs to be monitored,” they said.

The April inflation measured by the Consumer Price Index (CPI) rose to 3.5% from 3.4% in March, largely driven by food inflation, while core inflation remained steady.

The Wholesale Price Index (WPI) inflation, however, rose to 8.3% in April from 3.9% in March, recording a 42-month high, indicating “incipient price pressures in India”, the report observed.

RBI maintains that the views expressed in the report are of the researchers, who were guided by Deputy Governor Poonam Gupta.
“The financial conditions, crude oil prices and capital flows continue to pose challenges to the external sector outlook. Nevertheless, robust services exports, positive net FDI flows, foreign exchange reserve buffers and a number of proactive policy measures undertaken by the government and the RBI are likely to cushion the Indian economy against external headwinds,” they said.Economic activity showed a mixed trend in April. Industrial and services activity stayed strong in many segments, with most listed private non-financial companies showing quarter-on-quarter improvement in business performance in the fourth quarter. On the other hand, the merchandise trade deficit widened month-on-month in April on a rising import bill, primarily due to crude oil and gold.

In the agriculture sector, rapid progress of summer sowing was supported by above-normal pre-monsoon rainfall. However, a higher probability of above-normal minimum temperatures and unseasonal rains in some parts of the country pose risks to the harvesting of remaining rabi crops, the authors warned.