Outlook for low core inflation ‘good’: FinMin

The finance ministry, in its monthly economic review for January, has said the outlook for a reasonably low headline inflation rate is good in the upcoming months, with the stable downward movement in core inflation and moderation in food prices.

The retail inflation softened further to a three-month low of 5.10% in January 2024. Going forward, the outlook for the Indian economy appears bright, says the report said.

According to the latest release of inflation data for January 2024, month-on-month momentum in price indices of vegetables, pulses and overall food items is (-) 4.2%, (-) 0.9% and (-) 0.7%, respectively. “It is expected that food inflation will moderate further in the upcoming months.” 

The central bank in its latest bi-monthly policy meeting had revised the inflation projection for Q4 FY24 downward to 5%, from 5.2% in the previous MPC meeting. The RBI also kept the policy rate unchanged at 6.5% to facilitate full monetary transmission. 

“With the stable downward movement in core inflation and moderation in food prices, the outlook for a reasonably low headline inflation rate is good,” the ministry adds. 

The central bank during February’s MPC meeting had also forecast that India’s real GDP will grow at 7% in FY25, with risks evenly balanced. The ministry report says prospects of healthy rabi harvesting, sustained manufacturing profitability and underlying service resilience can support economic activity in FY25.

On the demand side, household consumption is “expected to improve”, according to the government. “While prospects for capital formation are bright owing to an upturn in the private capex cycle, improved business sentiments, healthy balance sheets of banks and corporates, and the government’s continued thrust on capital expenditure.” 

Globally, there has been an improvement in the outlook for trade. The FinMin says the rising integration in the global supply chain will support net external demand. Headwinds from geopolitical tensions like supply-chain disruptions and higher logistics costs, volatility in international financial markets, and geoeconomic fragmentation, however, still “pose downside risks”, the government report opines. 

On the monetary stance, there are views that it could remain tight in the coming months. Notably, downside risks to trade include a spike in new commodity prices from geopolitical shocks, including continued attacks in the Red Sea and supply disruptions or more persistent underlying inflation in the developed world, which could extend tight monetary conditions.

These geopolitical issues could impact the expected recovery in global demand, thereby affecting the prospects for India’s exports, the finance ministry says. It suggests that persisting uncertainties for global output and trade growth demand finding ways to enhance the competitiveness and attractiveness of India’s exports. 

On the contrary, says FinMin, the average crude oil FOB price for the Indian basket for FY24 (up to 12 February 2024) at USD 82.2/bbl remains lower than the average of USD 93.2/bbl during FY23, the data shows. “Core inflation for FY24 (up to January 2024) is also the lowest since FY21 (MOSPI). Lower input prices and overall inflation can influence output growth positively, which in turn can further improve the prospects for exports.”