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Reserve Bank of India’s (RBI) projection of retail inflation at 6.8% in the current fiscal is neither too high to deter private consumption, nor so low as to weaken inducement to invest, the Economic Survey said on January 31.
“However, entrenched inflation may prolong the tightening cycle and therefore, borrowing costs may stay ‘higher for longer’,” it said.
The Economic Survey 2022-23 was tabled in Parliament by Finance Minister Nirmala Sitharaman. The Survey details the state of economy in the current fiscal, while giving a sneak peek into the future.
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India’s retail inflation came down below 6% in November after remaining above RBI’s upper tolerance level for 10 months since January 2022. The Central bank last year projected inflation to average 6.8% in the current fiscal, before declining in the next fiscal.
“RBI has projected headline inflation at 6.8% in FY23, which is outside its target range. At the same time it is not high enough to deter private consumption and also not so low as to weaken the inducement to invest,” the Survey said. The Reserve Bank has the mandate to keep inflation at 4% with a band of (+/-) 2%.
India’s wholesale and retail price inflation remained high for most part of 2022 mainly due to supply chain disruptions following outbreak of the Russia-Ukraine war beginning from February, 2022.
Russia and Ukraine are among the most important producers of essential agricultural commodities, including wheat, maize, sunflower seeds and inputs like fertilisers. Together with other countries bordering the Black Sea, they constitute the world’s breadbasket.
The Survey said that ‘entrenched inflation’ may prolong the tightening cycle and therefore borrowing costs may stay higher for longer. “In such a scenario, global economy may be characterised by low growth in FY24,” it said.
However, the scenario of subdued global growth presents two silver linings — low oil prices and better than projected CAD (Current Account Deficit). “Overall external situation will remain manageable,” it added.
Retail or CPI inflation fell to a year low level of 5.72% in December, while wholesale or WPI inflation was at 22-month low of 4.95%.