Retail inflation holding back private investment: RBI bulletin

India’s higher retail inflation is slowing down personal consumption expenditure, leading to a moderation in corporate sales and holding back private investment in capacity creation, the Reserve Bank of India observed in its latest monthly bulletin.

“Bringing down inflation and stabilising inflation expectations will revive consumer spending, boost corporate revenues and profitability, which is the best incentive for private capex,” the central bank said in an article in its latest monthly bulletin.

India’s higher retail inflation is slowing down personal consumption expenditure, leading to a moderation in corporate sales and holding back private investment in capacity creation, the central bank said in an article.
While foreign portfolio investment flows may remain volatile, buoyancy in foreign direct investment inflows could be sustained.

The bank’s monetary policy committee (MPC), which met early this month, expressed the view that inflation’s trajectory warrants ‘continuous vigil’.

Headline consumer price index (CPI)-based inflation dropped during March-April this year to 4.7 per cent in April, the lowest since November 2021.

CPI inflation came down to a 25-month low of 4.3 per cent in May this year.

Headline inflation is likely to edge down to 5.1 per cent in fiscal 2023-24 from 6.7 per cent last year, the article said. It is still above the target.

Kharif sowing has begun on the back of a record rabi harvest, and the manufacturing sector has posted a pick-up in net profits, the article noted.

The net foreign direct investment (FDI) flows to India were worth $28 billion in fiscal 2022-23, down from $38.6 billion in the previous fiscal.

Foreign portfolio investors have increased their holdings of Indian equity and debt in May this year to the highest level since August last year, the highest among emerging market comparators. In the first half of June 2023 (up to June 19), close to $1.3 billion of portfolio investment has flowed into Indian markets.

The forward-looking evaluation of India’s prospects set out in the bank’s Annual Report indicates that while foreign portfolio investment flows may remain volatile, the favourable domestic growth outlook, lower inflation and business friendly policy reforms could help sustain buoyancy in FDI inflows while inward remittances are likely to remain robust.

The growth prospects of emerging market economies are particularly at risk as the trade engine sputters after decades of energising their integration into the global economy, the article added.

Fibre2Fashion News Desk (DS)