Food prices on the rise, domestic demand keeps economy strong

Kolkata: India has witnessed a broad-based sequential increase in food prices even as the recovery of southwest monsoon partly mitigates some of the risks the farm sector was facing, Reserve Bank of India's (RBI) monthly state of economy report said.

The overall economy continued to show resilience, backed by improved domestic demand, while the global economic outlook continues to be weighed by renewed escalation of West Asia conflicts and fresh tariffs imposed by the US.

The country's monetary policymakers have particularly been wary of any broad-based increase in inflation as this could lead to policy tightening, the minutes of the central bank's monetary policy meeting released last week showed.

The headline inflation measured by Consumer Price Index remained above the 4% target - 4.5% in July and 4.4% in June - primarily on account of supply-side pressures. Stable core inflation, meanwhile, reaffirmed the lower pass-through of cost pressures.

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The central bank's high-frequency indicators for July reflected strong economic activity and domestic demand, supported by rural demand, the state of the economy report observed. The momentum in manufacturing and services activity seen in the first quarter continued in July while merchandise exports and imports saw double digit expansion.

The country's merchandise trade deficit widened in July, both year-on-year and sequential basis, primarily driven by electronic goods. The oil deficit remained unchanged even as the price of the Indian basket crude oil increased to $89.7 per barrel in August, higher than the average price recorded in both June and July.

"The global economic outlook continues to be shaped by geopolitical frictions in West Asia and fresh tariffs by the US. Despite the risks to the global trade and growth-inflation matrix, India's robust macroeconomic fundamentals continue to provide cushion to the domestic economy," said the report, prepared by RBI's economic researchers under the guidance of deputy governor Poonam Gupta.

RBI maintains that the views expressed in the report are of the authors.

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The additional 10% tariff imposed by the US with effect from July 24 clouded the bilateral trade even as India's major export commodities to the US, such as smartphones, petroleum products and pharmaceuticals, remain outside its purview. "India is likely to be less affected than some of the Asian economies in the US market, such as China, Vietnam and Thailand," the RBI report said.

China, Vietnam and Thailand face an additional 12.5% tariff.

Meanwhile, the financial market recorded high credit growth amid comfortable liquidity, and softening government bond yields supported by a rise in capital inflows.