Growth prospects still remain uncertain

The tone of the April resolution of MPC and its May 4 decision, when compared to earlier post-pandemic resolutions, clearly shows a shift in policy priorities. While MPC’S earlier resolutions were categorical about doing all it will take to revive growth, of late there has been a growing concern about the inflationary threat to the economy even at a time when demand continues to be low. “The MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects”, the May 4 resolution of the MPC said. “We agree with RBI that today’s move will strengthen medium term growth. Our work clearly shows that high inflation is detrimental to growth”, HSBC Chief India Economist Pranjul Bhandari said in a research note issued on May 4. The larger consensus on the centrality of controlling inflation notwithstanding, the extent of inflationary contribution to near-term headwinds to growth remains uncertain with possible upside risks.

For example, India’s services PMI reached 57.9 in April, up from 53.6 in March. “The seasonally adjusted S&P Global India Services PMI Business Activity Index highlighted a sharp rate of expansion that was the fastest since last November”, the press release said. However, business confidence went down despite such a sharp improvement in PMI. “Inflation concerns restricted business confidence in April. Although still positive overall, the overall level of sentiment slipped from March and was much lower than its long-run average”, the PMI release said.