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The Reserve Bank of India (RBI) has identified “climate shocks” as a risk to food inflation rates and overall price rise while stating that the outlook for the country’s economic growth remains bright.
In its Annual Report for 2023-24, released on Thursday, the central bank said easing supply-chain pressures, broad-based softening in core inflation, and early indications of an above-normal southwest monsoon meant well for the inflation outlook in 2024-25.
“The increasing incidence of climate shocks, however, imparts considerable uncertainty to the food inflation and overall inflation outlook,” said the RBI while noting headline inflation moderated by 1.3 percentage points on an annual average basis to 5.4 per cent in 2023-24.
The report said low water levels in reservoirs, especially in southern states, and the outlook of above-normal temperatures during the initial months of 2024-25 needed close monitoring.
“The volatility in international crude oil prices, the persisting geopolitical tensions, and elevated global financial market volatility also pose upward risks to the inflation trajectory,” the RBI said.
Growth in the consumer price index for 2024-25 (FY25) is projected at 4.5 per cent with risks evenly balanced.
As regards food inflation, the RBI said it remained vulnerable to recurring supply shocks.
The report said as headline inflation eased towards the target, it would spur consumption demand especially in rural areas.
The central bank reiterated it would remain nimble and flexible in its liquidity management.
Observing that the Indian economy was navigating an adverse global macroeconomic and financial environment, the report said its prospects were bright.
Real gross domestic product growth for FY25 is projected at 7 per cent with risks evenly balanced, the report said.
It highlighted that the government’s continued thrust on capital expenditure (capex) while pursuing fiscal consolidation, and consumer and business optimism, augured well for investment and consumption demand.
“The Union government’s impetus to growth-inducing capital spending is likely to be sustained in 2024-25 with more than half of borrowings directed towards financing of capital outlay,” the report said while adding the fiscal outlook for states remained favourable, with adequate room to pursue increased capital expenditure.
The report cautioned that the Indian economy would also have to navigate the medium-term challenges posed by rapid adoption of artificial intelligence/machine learning.
The RBI expects India’s merchandise exports to benefit from the projected rebound in global trade, but with downside risks from ongoing geopolitical conflicts and geoeconomic fragmentation.
The central bank reiterated that the current account deficit was expected to remain manageable in FY25, given a resilient services trade balance and large inward remittance receipts, on the one hand, and stable capital flows, on the other.
Commenting on the financial sector, the report noted the capital and asset quality of banks and non-banking finance companies remained healthy.
On liabilities, the report said it was imperative to focus on the diversification of deposit sources.
It cautioned commercial banks about trading and bank-book risks due to interest-rate movements and moderating margins.
