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

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.