RBI’s economic activity index nowcasts Q3 growth at 7%

RBI’s economic activity index (EAI) has nowcast GDP growth for Q3 (October-December) FY24 at 7 per cent, according to an article in the central bank’s latest monthly bulletin.

This is higher than the real GDP growth projection of 6.5 per cent for Q3FY24 made in the Governor’s December 2023 monetary policy statement.

“In India, economic activity remained resilient on the back of robust domestic demand, notwithstanding the external headwinds.

“Supply chain pressures in India ebbed in December and remained below historical average levels,”per the article “State of the Economy”put together by RBI officials.

The authors noted that the Indian economy recorded stronger than expected growth in 2023-24, underpinned by a shift from consumption to investment.

Further, the government’s thrust on capex is starting to crowd-in private investment.

Restrain Inflation

Headline inflation recorded a marginal uptick in December to 5.7 per cent (from 5.6 per cent in November), driven by higher food inflation due to unfavourable base effects.

The authors observed that private consumption, which accounts for 57 per cent of GDP, languished in the backwash of the slow but steady revival of the rural economy.

“This only serves to underscore our consistently held view that inflation has to be restrained to its target (of 4 per cent) for growth to be inclusive and sustained.

“In fact, in the fast moving consumer goods space, companies are reporting a faster growth of volumes than of value despite lower than expected festival spending and a higher pass-through of lower raw material costs by producers to consumers. Spillovers to gross value added by trade are also showing up in the NSO’s first advance estimates,” the officials said.

The authors noted that in India, potential output (the maximum amount of goods and services an economy can turn out when it is most efficient) is picking up with actual output running above it, although the gap is moderate.

“In 2024-25, the objective should be to sustain this momentum by securing real GDP growth of at least 7 per cent in an environment of macroeconomic stability.

“Accordingly, inflation needs to align with the target by the second quarter of the year, as projected, and get anchored there,” they said.

The officials emphasised that balance sheets of financial institutions need to be strengthened and asset quality improved even further. The ongoing consolidation of fiscal and external balances needs to continue.

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