RBI’s steeplechase with cyclical and structural hurdles
inflation is not yet under control, the RBI's latest assessment warns against a hasty return to monetary accommodation.
The conviction that India is insulated from global economic slowdowns and in a growth acceleration phase has also diminished. The RBI now anticipates downside risks to growth due to falling corporate profits and reduced government spending.
Persistently high food inflation appears at odds with the recently published Consumer Expenditure Survey (HCES 2022-23), which indicates that the proportion of food consumption in household spending has decreased over the past 13 years.
Given the current structural context of declining average real income growth, which has reached a 40-year low, the persistently lower headline inflation continues to impact households adversely. In light of these conditions, the central bank should consider targeting an inflation rate below the outdated 4% benchmark set in 2016.
RBI's projections for FY25 at 4.5% remain above the five-year CAGR in nominal wage per worker at 4% FY24 (-1.6% in real terms, RBI, KLEMS 2023-24), which weighs on households.
Based on our assessment that food consumption has risen instead of declined, a recast of CPI weights based on an erroneous interpretation of the CES data in an attempt to lower headline inflation can pose a risk to macro stability.
Home equity loans or top-up loans on various assets (gold & others) lack adequate monitoring by lenders, thereby exposing them to default risks from funding speculative activities.
RBI's concerns
