Inflation is showing signs of softening, providing much-needed relief to the government as well as the managers of the economy, not to speak of the common man, whose household budgets have been under a squeeze given skyrocketing prices. The improvement is reflected in the latest rate hike by the Reserve Bank, which is by a lower margin of 35 basis points compared to the three previous instances of 50 each. So far so good. But the important point not to be missed is that the reversing trend is in keeping with a global trend rather than any spectacular success that can be credited to only India. Inflation over the world has begun to decline, which is primarily attributed to falling oil prices as well as improvements in the supply chain, which had been one of the biggest casualties of the pandemic era. Though the central banks are still a long way off their comfort zone inflation level of 2 percent, they have been largely successful in taming the problem, with rate increases and other appropriate policy mechanisms. They have been aided by some very favourable developments in the energy sector.
Although the Reserve Bank continues to swear by uncertainties in the global economy, with core inflation still indicating stickiness and medium-term outlook remaining exposed to global developments and weather, it has indicated a continuation of the policy of ‘withdrawal of accommodation’. RBI has revised upwards the retail inflation forecast marginally to 6.6 percent and 5.9 percent for the third quarter and fourth quarter respectively and hopes to bring down CPI inflation to 5 percent and 5.4 percent in the first and second quarters of next year. Simultaneously, there has been an improvement in the foreign exchange situation. According to the RBI, forex reserves have increased for the fourth straight week, with valuations greatly benefiting from the fall in the dollar vis-à-vis other major currencies. The reserves stood at USD 561.16 billion by the first week of December, enough to pay for almost nine months’ import requirements.
India is, however, better placed in these respects than Europe, where double-digit inflation and the soaring cost of living are giving tough times to consumers in the whole continent. Despite the onset of the festival shopping season, retail sales are down and consumer confidence has plummeted to levels lower than where they were at the peak of the pandemic. In contrast, retail demand in India is consistently increasing and the effect of inflation seems to be cooling off for the sector. A recent CII event said that in this respect India is much better than the rest of the world. Particularly, demand in rural India is picking up and there is a lot of value-seeking behaviour, according to FMCG major ITC. According to reports, India’s factory activity expanded at its fastest pace in three months in November. The Manufacturing Purchasing Managers’ Index, compiled by S&P Global, rose to 55.7 last month compared with 55.3 in October, marking the 17th successive month of expansion in manufacturing production across India. Although overall economic growth slowed to 6.3 percent in the previous quarter, compared to the 13.5 percent growth reported in the previous three months. There has been an improvement in overall business confidence. Reflecting the positive sentiment, employment also rose at the quickest rate since January 2020 barring October.