Growth momentum quickens in Q2, food inflation a concern: RBI

Mumbai: The second quarter of 2024-25 has begun with signs of quickening momentum in the economy though inflation in the food basket remains a concern, said the Reserve Bank's July Bulletin released on Thursday.

An article on 'State of the Economy' in the monthly Bulletin also said the improvement in the outlook for agriculture and the revival of rural spending have turned out to be the bright spots in the evolution of demand conditions.

Consumer price inflation ticked up in June 2024 after three consecutive months of moderation as a broad flare-up in vegetable prices halted the overall disinflation that had been underway, it said.

"The argument that food price shocks are transitory does not seem to be borne out by the actual experience over the past one year – too long a period for a shock to be termed as transitory!" said the article authored by a team led by RBI deputy governor Michael Debabrata Patra.

Superimposed on this ‘persistent’ component are sporadic spikes in prices of a range of vegetables that overlap across constituents to give the broader category of vegetable inflation an enduring character.

Food prices are clearly dominating the behaviour of headline inflation and households’ inflation expectations, undermining the gains of lowering core and fuel inflation through a combination of monetary policy and supply management, they said.

Given the high uncertainty shrouding the inflation outlook, it is prudent to eschew the temptation of time inconsistency and stay the course on the straight and narrow path of aligning inflation with the target of 4 per cent.

"This does not imply that inflation should reach 4 per cent and stay there before monetary policy considers a change in stance; instead, based on a careful evaluation of the balance of risks, an enduring movement towards the target should provide signals to forward-looking monetary policy to respond," the article said.

The central bank, however, said the views expressed in the Bulletin article are of the authors and do not represent the views of the Reserve Bank of India.

The detailed article on the state of the economy said that after remaining in surplus in the early part of June 2024, system liquidity turned into a deficit in the second half of the month due to advance tax payments and goods and services tax (GST) related outflows amidst sluggish government spending.

It again turned into a surplus from June 28, 2024, with the usual drawdown in government cash balances at the month-end.

Gross inward foreign direct investment (FDI) at USD 15.2 billion during April-May 2024 was higher than USD 12.3 billion recorded a year ago. More than 80 per cent of the gross FDI inflows were concentrated in sectors such as manufacturing, financial services, computer services, business services, and electricity and other energy.

Major source countries included Mauritius, Singapore, the Netherlands, the US and Cyprus, accounting for more than 80 per cent of the flows.

Net FDI at USD 7.1 billion in April-May 2024 more than doubled from USD 3.4 billion a year ago, due to a rise in gross inflows and a moderation in repatriation.

Also, non-resident deposits recorded net inflows of USD 2.7 billion in April-May 2024 as compared to USD 0.6 billion a year ago, led by higher inflows in all three accounts namely, Non-Resident (External) Rupee Accounts, Non-Resident Ordinary (NRO) and Foreign Currency Non-Resident [FCNR(B)] accounts.