State of the economy

The recent RBI bulletin (April 2024) contains an interesting article on the current state of the economy. The article is written by officers of RBI and does not represent the official views of RBI.

The authors find most macroeconomic parameters positive and growth-supportive. The two areas of concern are climate and geopolitics. Overall, the global economy, and particularly the Indian economy, is stable and oriented towards resilient growth in 2024.

Some of the noteworthy points in the article could be listed as follows:

Global economy

Growth: Global growth remains resilient despite geopolitical challenges and extreme weather event risks. In its latest world economic outlook (WEO April 2024), the International Monetary Fund (IMF) raised the global growth forecast for 2024 to 3.2%, 10 bps higher than its January 2024 Update, and expected the global economy to grow at the same pace in 2025 in also. Advance Economies (AEs) are now expected to grow by 1.7% in 2024 against the forecast of 1.5% in January. Emerging Market and Developing Economies (EMDEs), the forecast has been revised up by 10 bps to 4.2%.

In March 2024 The global manufacturing PMI accelerated to its highest reading since July 2022 as new orders, output, and employment expanded. The manufacturing component reached a 20-month high; the services export orders index has remained in expansionary territory since January 2024.

Inflation: Headline inflation receded significantly from levels recorded a year ago in most economies, although it remained above targets. The global headline inflation is expected to fall from an annual average of 6.8% in 2023 to 5.9% in 2024 and further to 4.5% in 2025 (both revised up by 0.1 percentage points from previous projections), with AEs returning to their inflation targets sooner than EMDEs.

Consumer sentiment: Consumer sentiments continued to improve across geographies as inflationary pressures receded from year ago highs, supported by broadly stable employment prospects. Financial conditions remained accommodative on the back of strong equity market performance.

Trade: According to the UNCTAD Global Trade Update of March 2024, global trade is expected to gain momentum in 2024 after a decline of 3% in 2023. WTO in its Global Trade Outlook and Statistics – April 2024 projected world merchandise trade volume to grow by 2.6% in 2024 and 3.3% in 2025, following a larger-than-expected decline of -1.2% in 2023.

Monetary policy: Major central banks, especially in AEs, remained cautious, balancing the risks of cutting too soon against maintaining a restrictive stance for too long and hurting economic activity with financial stability risks. Most AE central banks held their policy rates constant in their latest meetings.

Treasury yields and mortgage rates are ticking up in major economies as expectations of interest rate cuts are being pared.

FDI Flows: A recent UNCTAD report estimated a modest rise in global FDI flows in 2023 over 2022, driven by two European countries (Luxembourg and Netherlands); however, excluding these countries, global FDI flows declined by about 18% in 2023. Amidst an uncertain global investment environment, India held its position as a favourable investment destination among peer Asian economies in 2023. India ranked fourth among EMEs in the 2024 FDI Confidence Index, reflecting continued optimism over its growth potential.

Domestic economy

The Indian economy continued to exhibit resilience amidst external headwinds which led to the build-up of supply chain pressures. Consumer confidence strengthened across parameters set out in the RBI’s latest survey of households. Enterprise surveys indicate that business assessment and expectations remain in positive terrain, with optimism on production, capacity utilisation (CU), order books, employment and overall business conditions. According to the economic activity index (EAI), economic activity remained resilient in Q4:2023-24, although available data indicate some moderation in March vis-à-vis the previous month on a seasonally adjusted basis.

Growth: The conditions are shaping up for an extension of the trend upshift that took the average real GDP growth above 8% during 2021-24. In order to achieve its developmental aspirations over the next three decades, the Indian economy must grow at a rate of 8-10 per annum over the next decade to reap the demographic dividend that started accruing from 2018 and, as calculations show, will last till 2055.

The domestic economic activity remains resilient, backed by strong investment demand and upbeat business and consumer sentiments. Headline inflation has come off the December peak; however, food price pressures have been interrupting the ongoing disinflation process even as shocks from adverse climate events and geopolitical tensions add uncertainties to the outlook. The Monetary Policy Committee of RBI, in its last meeting, projected real GDP growth for 2024-25 at a robust rate of 7%.

High-frequency indicators point to sustained momentum in domestic demand conditions in March 2024. As per the data from the Centre for Monitoring of Indian Economy (CMIE), the all-India unemployment rate (UR) fell to 7.6% in March, declining across both urban and rural regions. Agricultural prospects are expected to receive a boost amidst the IMD’s forecast of an above normal monsoon.  Construction sector indicators reflected sustained growth in steel consumption and cement production. Available high frequency indicators for the services sector exhibited an optimistic picture in March 2024.

Inflation: Headline inflation moderated to 4.9% in March 2024 from 5.1% in February 2024. Core inflation eased further to 3.3% in March from 3.4% in February, the lowest in the current CPI (2012=100) series. The moderation was broad-based, with inflation softening across various sub-groups barring personal care and effects, and recreation and amusement. In terms of regional distribution, while CPI-rural inflation increased by around 10 bps to 5.4% in March, CPI-urban inflation moderated by 64 bps to 4.1%. Most of the states continued to record inflation in the range of 4-6%.

Food price uncertainties continue to weigh on the inflation outlook with the increasing incidence of climate shocks a key upside risk for food prices. Cost push pressures faced by firms are showing an upward bias and the recent firming up of international crude oil prices poses an upside risk to the path of inflation going forward. CPI inflation for 2024-25 is expected to be 4.5% with risks evenly balanced.

Financial Conditions: Liquidity conditions eased in March, with net liquidity adjustment facility (LAF) [including marginal standing facility (MSF)] injection narrowing to ₹0.29 lakh crore from ₹1.78 lakh crore in February 2024. Increased government spending and the RBI’s market operation smoothed system liquidity. While the buildup of government cash balances on account of GST collections and advance tax payments tightened liquidity intermittently, liquidity conditions turned into surplus towards March-end and early April in response to the increase in government spending. Overall, the Reserve Bank injected ₹4.16 lakh crore cumulatively into the banking system during March 16 - April 19, 2024.

Reflecting these liquidity developments, the weighted average call rate (WACR) – the operating target of monetary policy – has remained within the policy corridor since the February policy meeting, barring the usual year-end spike.

Across the term money market segment, yields on 3-month treasury bills (T-bills), certificates of deposit (CDs) and commercial papers (CPs) for non-banking financial companies (NBFCs) eased towards end March and early April. The average risk premia in the money market (3-month CP minus 91-day T-bill) reduced to 98 bps during March 16 – April 19, 2024 from 141 bps during February 16 - March 15, 2024. While short-term rates moved in tandem with the evolving liquidity developments, long-term rates remained largely stable. Corporate bond yields generally softened and risk premia narrowed during March 16 to April 19, 2024.

External conditions: India’s foreign exchange reserves reached an all-time high of US$ 648.6 billion on April 5, 2024. As on April 12, 2024, India’s foreign exchange reserves stood at US$ 643.2 billion, sufficient to cover for 99% of total external debt outstanding at end-December 2023.

India’s current account deficit (CAD) improved to 1.2% of GDP in Q3:2023-24 from 1.3% in Q2:2023-24 and 2.0% in Q3:2022-23. Robust services exports and strong remittance receipts eased merchandise import pressures on the current account in Q3:2023-24. Net capital inflows exceeded the CAD, supported by robust FPI and banking capital, leading to an accretion of foreign exchange reserves on a balance of payment (BoP) basis (excluding valuation effects) to the tune of 6.0 billion during the quarter.

At end-December 2023, India’s external debt stood at US$ 648.2 billion; the external debt to GDP ratio declined to 18.7% at end-December 2023 (at end-September 2023 it was 18.8%). India’s external sector exhibited resilience, indicated by sustainable levels of key vulnerability indicators at end-December 2023.

Currency: The Indian rupee (INR) depreciated marginally by 0.04% (m-o-m) vis-à-vis the US dollar in March 2024 while remaining one of the least volatile major currencies.

Climate challenge

Global weather agencies are in agreement that March 2024 was the warmest March since record-keeping began in 1850 – global surface temperature was at 1.6 degrees Celsius (3.01°F) above the 1880-1899 period.

The World Meteorological Organisation (WMO) sounded a red alert about global warming in its latest report “State of the Global Climate 2023”, stating that there is a high probability that 2024 will breach the threshold set in 2023 as the hottest year on record even as the world careens towards a freshwater shortage crisis. According to the WMO report, “data from the Indian Meteorological Department (IMD) reflects a worrying escalation in extreme weather events necessitating an urgent and collective response.”

Central bank conundrum

Central banks continue to speak in cautious tones about growth prospects in 2024 as they deal with the interest rate conundrum. Regime shifts are underway in the form of exits from negative interest rates and their unintended consequences. Expectations of interest rate cuts are being pared where they have not yet commenced in recognition of the risk of moving too fast and turning disruptive if inflation moves up again with the lift provided by buoyant economic activity. Switzerland became the first AE to cut interest rates, reflecting a wariness of currency appreciation and an eagerness to join the growth party, given that inflation is well within the tolerance band.