India’s Inflation Is Anchored Despite May Pickup, RBI Says

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(Bloomberg) — Indian inflation remains anchored below the central bank’s target despite the recent energy shock, as pass-through to domestic prices has been limited, the Reserve Bank said in a monthly bulletin. 

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India’s economy entered this current bout of global turbulence with “much better fundamentals relative to many other countries,” including high growth, anchored inflation expectations, fiscal consolidation, a manageable current account balance and foreign exchange buffers, the report published late Monday said.

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The assessment highlights why policymakers remain relatively comfortable with India’s economic outlook, helping explain the monetary policy committee’s decision to hold the benchmark rate at 5.25% this month while retaining a neutral stance.

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Inflation climbed to 3.9% in May from 3.5% the previous month but remained below the RBI’s 4% target. The economy grew 7.8% in the three months through March 31, while high-frequency indicators over April and May have pointed to sustained momentum, the bulletin showed.

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India’s external sector also remained resilient, supported by foreign direct investment inflows and adequate foreign exchange reserves, it said. 

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Recent volatility in global energy markets nevertheless posed a challenge. Rising fuel costs and concerns over energy supplies weighed on sentiment during the recent flare-up in Middle East tensions, contributing to a slowdown in economic activity in June, according to a flash survey by HSBC Holdings Plc. Minutes of the RBI’s latest policy meeting showed policymakers expected the outlook to improve once geopolitical tensions eased.

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With risks from the Middle East receding, attention is shifting to the southwest monsoon. The central bank has warned that deficient rains could have “implications for agricultural production and rural demand.”

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“If the geopolitical situation remains contained and a durable peace takes hold in the Middle East, the monsoon could emerge as the next major risk to the economy,” said Vivek Kumar, an economist with QuantEco Research.

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The central bank cautioned that the global economic landscape remains fragile despite the interim US-Iran peace agreement and warned that any breakdown could rekindle inflation pressures and disrupt trade, investment and commodity markets.

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(Updates with details on PMI in sixth paragraph.)

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