Unchecked ‘sticker shock’ from inflation can hurt manufacturing and economy, RBI says

The Reserve Bank of India (RBI) said if inflation is allowed to run unchecked, it can undermine the prospects of India’s economy, especially for industry and exports.

This comes after the headline consumer price index (CPI) inflation rose above the upper tolerance band in October 2024, in what the central bank described as a “sticker shock” after the “wake-up call of September’s spike,” in its November 2024 bulletin.

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By how much did India’s retail inflation grow?

India’s retail inflation rose to 6.21% in October 2024, compared to 4.87% in October 2023 primarily due to rising vegetable prices.

Vegetables prices rose by a staggering 42.18% in October 2024, compared to October 2023.

This level of inflation is already biting into urban consumption demand as well as corporates’ earnings and capex at a time when the outlook for India’s exports is brightening, the RBI wrote.

However, the RBI also said that with the sharp increase in kharif output and optimism around rabi production with a record food grains target for 2024-25, this will come under control in the near future.

The third quarter of the financial year 2024-25 saw an uptick in demand primarily driven by the festive season and the marketing efforts of companies, especially FMCG and auto ones to catch the attention of generation Z and revive demand.

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E-two-wheelers in particular, were described as having “sparkled this Diwali,” with premiumisation being the basic theme.

The RBI says that by 2025, half of India’s population is expected to live in cities, boosting urban demand amid the rise of new cities across the country with the urban population surging fourfold.

“All that is needed is get inflation down so that India reconnects with its potential,” it wrote.

Impact of inflation on manufacturing

The RBI stressed the impact of inflation on manufacturing because it said over the past few months, India has been gaining a share in theglobal trade of key manufacturing items, making it a crucial moment.

Specific examples include the country currently holding 13% or a sixth of the global market share in petroleum products, being the largest exporter of precious and semi-precious stones, the third largest exporter of insecticides, the eighth largest in rubber pneumatic tyres, and ninth in semiconductors.

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