Inflation Slowing Down Consumption, Holding Private Investment: RBI Bulletin

The retail inflation based on the consumer price index (CPI) remained above 5 per cent during 2022-23. Although in May inflation fell to a two-year low of 4.25 per cent.

The RBI monetary policy committee (MPC) retained the key policy rate, repo, at 6.5 per cent and continued the policy stance as withdrawal from accommodation.

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A Reserve Bank of India article published on Friday said that inflation is slowing down personal consumption expenditure, which in turn is moderating corporate sales and holding back private investment in capacity creation. The 'State of the Economy' article published in the RBI monthly bulletin emphasized the need for lowering inflation to revive consumer spending and boost corporate revenues and profitability.

"Recent national accounts data and corporate results when read in conjunction clearly show that inflation is slowing down personal consumption expenditure. This, in turn, is moderating corporate sales and holding back private investment in capacity creation. Bringing down inflation and stabilising inflation expectations will revive consumer spending, boost corporate revenues, and profitability, which is the best incentive for private capex," said the article authored by a team led by RBI Deputy Governor Michael Debabrata Patra. 

The retail inflation based on the consumer price index (CPI) remained above 5 per cent during 2022-23. Although in May inflation fell to a two-year low of 4.25 per cent, following RBI's monetary policy actions and government measures.

The RBI monetary policy committee (MPC) retained the key policy rate, repo, at 6.5 per cent and continued the policy stance as withdrawal from accommodation. The MPC has been fighting a prolonged war on inflation for the last three years. The rate-setting panel has hiked interest rates by 250 basis points since May last year before entering into what appears as a prolonged pause.

In the minutes of the policy releases on June 22, most MPC members had highlighted that the battle on inflation is far from over and the MPC cannot afford to let guard on inflation fight. Deputy Governor Michael Debabrata Patra said monetary policy needs to remain in 'brace' mode, ensuring that the effects of these shocks dissipate without leaving scars on the economy.

The Reserve Bank, however, noted that the views expressed in the RBI bulletin articles are of the authors and do not represent the views of the Reserve Bank of India.

The article further said global economic activity has sustained its growth momentum in the second quarter of 2023, albeit with two diverging roads.

"While economies like India are rebounding, some others are slowing or contracting," it said.

India’s real GDP growth in Q4 2022-23 at 6.1 per cent was the highest among major economies of the world, and CPI inflation came down to a 25-month low of 4.25 per cent in May 2023. Kharif sowing, it said, has begun on the back of a record rabi harvest, and the manufacturing sector has posted a pick-up in net profits.

Credit growth is rebasing to more durable sources of funding, and the rupee is turning out to be the most stable currency among emerging market peers.