RBI Governor Shaktikanta Das on Friday said the central bank has retained its FY23 GDP forecast at 7.2 per cent and added that the Indian financial system remains resilient. He also said high-frequency indicators of the services sector like railway freight traffic, port freight traffic, e-way bills, toll collections and commercial vehicle sales also remained robust in June and July.
While presenting the August bi-monthly monetary policy, Das said, “The Indian financial system remains resilient. This will help the economy in emerging out of the shadows of the pandemic and the impact of the war in Europe. While the banking system remains well capitalised and profitable, a deleveraged corporate sector augurs well for sustaining the recovery.”
He also said the Indian economy has naturally been impacted by the global economic situation. We have been grappling with the problem of high inflation. Financial markets have remained uneasy despite intermittent corrections.
“We have witnessed large portfolio outflows to the tune of US$ 13.3 billion during the current financial year so far (up to August 3). Nevertheless, with strong and resilient fundamentals, India is expected to be amongst the fastest growing economies during 2022-23 according to the IMF, with signs of inflation moderating over the course of the year.”
Das said that on the demand side, indicators such as production of consumer durables, domestic air passenger traffic and sale of passenger vehicles suggest improvement in urban demand. Rural demand indicators, however, exhibited mixed signals – while two-wheeler sales increased, tractor sales contracted in June over a high base though.”
He said investment activity is also picking up – the production of capital goods recorded double-digit growth for the second month in a row in May and import of capital goods also witnessed robust growth in June. PMI manufacturing rose to an 8-month high in July. PMI services indicated continued expansion in July, although it fell from an over 11-year high of June.
“Looking ahead, a good progress of the southwest monsoon and kharif sowing would support rural consumption. Urban consumption is expected to benefit from the demand for contact-intensive services, better performance of corporates and improving consumer optimism. The increase in capacity utilisation, the government’s capex push and large expansion in bank credit should support investment activity. According to our survey, manufacturing firms expect sustained improvement in production volumes and new orders in Q2:2022-23, which is likely to sustain through Q4,” he added.
The RBI governor said that the domestic economy faces headwinds from global forces — protracted geopolitical tensions; rising global financial market volatility; tightening global financial conditions; and global recession risks.
“Taking all these factors into consideration, the real GDP growth projection for 2022-23 is retained at 7.2 per cent, with Q1 at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4.0 per cent, with risks broadly balanced. Real GDP growth for Q1:2023-24 is projected at 6.7 per cent,” he said.
Shaktikanta Das said the inflation trajectory continues to be heavily contingent upon the evolving geopolitical developments, international commodity market dynamics, global financial market developments and the spatial and temporal distribution of the south-west monsoon.
Das added, “Since the last MPC meeting, however, there has been some let-up in global commodity prices – particularly in prices of industrial metals – and some softening in global food prices. Domestic edible oil prices are expected to soften further on the back of improving supplies from key producing countries and government’s supply-side interventions. The resumption of wheat supply from the Black Sea region, if it sustains, could help to temper international prices. Supply chain pressures, though elevated, are on an easing trajectory.”
Incidence of unseasonal and excessive rainfall, if any, can impact food prices, especially vegetable prices. Greater transmission of input cost pressures to selling prices across manufacturing and services sectors may also create fresh price pressures. Moreover, persistently elevated cost of living conditions could translate to higher wages and further price increases, especially if pricing power of firms strengthen, he said.
The RBI governor said, “Taking into account these factors, and on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, inflation is projected at 6.7 per cent in 2022-23, with Q2 at 7.1 per cent; Q3 at 6.4 per cent; and Q4 at 5.8 per cent, with risks evenly balanced. CPI inflation for Q1:2023-24 is projected at 5.0 per cent.”
On External Sector
He said India’s external sector has weathered the storm while navigating through the recent global spillovers. Merchandise exports grew in April-July 2022 while merchandise imports surged to record high on the back of elevated global commodity prices. Consequently, the merchandise trade deficit expanded to US$ 100.0 billion in April-July 2022.
“Provisional data indicate that demand for services exports, especially IT services, remained buoyant in Q1 despite global uncertainty. Exports of travel and transport services also improved in Q1:2022-23 on a year-on-year basis,” Das added.
From the external financing perspective, net foreign direct investment (FDI) at $13.6 billion in the first quarter of 2022-23 was robust as compared to $11.6 billion in the first quarter of 2021-22. Foreign portfolio investment, after remaining in exit mode during April-June 2022, turned positive in July 2022.