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Extreme weather events, Middle East tensions might risk inflation, RBI warns
Policymakers are facing challenges in dealing with high inflation emanating from supply shocks as it is difficult to know if they are permanent or temporary and whether they are going to have second-round effects
Extreme weather events and prolonged geopolitical tensions might risk inflation in India, the Reserve Bank of India said.
In its April bulletin, the RBI said that consumer price index (CPI) has gravitated to 4.9% in March after averaging 5.1% in the preceding two months.
One of the six articles articles that are part of this month’s RBI bulletin, ‘The State of Economy’ mentioned that global weather agencies are in agreement that March 2024 was the warmest March since record-keeping began in 1850—the global surface temperature was at 1.6 degrees Celsius (3.01°F) above the 1880-1899 period.
Despite challenges, the article said, conditions are shaping up for an extension of a trend upshift in real GDP growth, backed by strong investment demand and upbeat business and consumer sentiments.
After a surge in the last quarter of 2023, global growth momentum has been sustained in the first quarter of 2024, suggesting only a mild moderation ahead, it added.
According to the United Nations Conference on Trade and Development (UNCTAD), the global outlook for trade is turning positive, reversing the contraction seen in 2023. Still, broader risks from logistics and transport disruptions remain.
The World Trade Organisation (WTO) revised its merchandise trade volume growth for 2024 from its October 2023 forecast but expected demand to rebound as inflationary pressures ease and real household incomes improve.
April bulletin also includes another authored article, ‘Food and fuel prices: Second round effects on headline inflation in India,’ that says how policymakers are facing challenges in dealing with high inflation emanating from supply shocks as it is difficult to know if they are permanent or temporary and whether they are going to have second-round effects.
Following the adoption of flexible inflation targeting (FIT) in India, the second-round effects of food and fuel inflation on headline inflation have become subdued, and the impact of food shock on core inflation has reduced over time, while fuel shock has increased recently. The decline in persistence and pass-through of food shocks to core inflation is attributed to a better anchoring of inflation expectations.
RBI’s April bulletin includes an article unraveling the factors responsible for countries’ rising service exports. The article ‘What drives India’s Services Exports’ elaborates on India’s significant services exports and provides deeper insights into critical issues such as the contribution of price and volume effects, the long-term trend, revealed comparative advantage, and price and income elasticities—stating that India has an edge in telecom and IT services and the significant growth in India’s software and business services exports in the recent years is a reflection of the expansion of global capability centers (GCCs) in India and the rise in digital delivery of services.
The article mentioned how the initial boom in the services sector in the 2000s moderated after the global financial crisis of 2008-09. However, the trend was reversed around 2016, benefiting from the improvements in transport, logistics, information technology, technological advancements, and service value chains.
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