Bringing down inflation key to reviving private capex in India – RBI bulletin

By Swati Bhat

MUMBAI (Reuters) – Bringing down inflation, as well as market and household expectations of future inflation would be key to reviving private capital expenditure, the Reserve Bank of India said in its monthly bulletin released on Friday.

“Recent national accounts data and corporate results when read in conjunction clearly show that inflation is slowing down personal consumption expenditure,” the RBI said in its article on the ‘State of the Economy’.

“This, in turn, is moderating corporate sales and holding back private investment in capacity creation.”

Private consumption grew at a sluggish 2.8% in the January-March quarter of FY23, while it grew 0.5% on a seasonally adjusted sequential basis after contracting 2% in the previous three months.

However, gross fixed capital formation, which reflects government and private investment, rose 8.9% in the January-March quarter and 11.4% for the full financial year.

“Bringing down inflation and stabilising inflation expectations will revive consumer spending, (and) boost corporate revenues and profitability, which is the best incentive for private capex,” the RBI said.

India’s monetary policy committee (MPC) has raised key rates by a total of 250 basis points since May 2022, but held steady in April and June, reiterating the pause was not a pivot and that rates would be raised if warranted by evolving inflation-growth dynamics.

The MPC’s ‘flexible inflation targeting framework’ helps growth preservation and promotion, the RBI said in the article.

“It is by no means the single-minded pursuit of a single target as the critics would have us believe. It is axiomatic that the path to high but sustainable inclusive growth has to be paved by price stability,” it said.

“Once this is realised, the trade-offs and dilemmas confronting the conduct of monetary policy fade away.”

(Reporting by Swati Bhat; Editing by Sohini Goswami)

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