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India’s near-term growth backed by domestic drivers: RBI officials

  • Published
    21st Dec, 2022
Context

Assessing the ‘State of the Economy’, the Reserve Bank of India (RBI) has observed that the near-term growth outlook for the Indian economy was supported by domestic drivers as reflected in trends in high frequency indicators.

Details of the indicators:

  • The OECD’s economic outlook report had noted that India will be the only major economy that may register growth in excess of 5.5% during 2023 and 2024.
  • Equity markets touched new highs during November, 2022 buoyed by strong portfolio flows to India.
  • Headline inflation moderated by 90 basis points to 5.9% driven by a fall in vegetables prices even as core inflation remained steady at 6%.

India’s growth and factors contributing:

  • 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.
  • The balance of risks is increasingly tilted towards a darkening global outlook and emerging market economies (EMEs) appear to be more vulnerable. Data suggest that global inflation may have peaked.
  • Other factors includes;
  • Financial conditions, and
  • Borrowing costs are making more consumers spending and housing demand, and stalling investment in new capacity creation.

Link between domestic prices and Inflation:

  • Inflation expectations refer to people (or households’ expectation of what the inflation rate will be in the future). And they matter because this expectation is what determines people’s economic behaviour.
  • If people expect higher inflation in the future, they may start purchasing things in present times to be used in future.
  • The net effect of these individual decisions to advance or postpone purchases or ask for higher wages etc. determines the course of a country’s economy.
  • For example, if people expect higher inflation and advance their purchases, all of a sudden there will be a spike in demand, far in excess of the supply, thus causing higher inflation.
  • As such, policymakers try to gauge what is happening to inflation expectations.
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