Context

The Reserve Bank of India (RBI) just-released State of the Economy report. The report suggests that while controlling inflation was a big concern in 2022, the bank may now be more focused on avoiding a recession in 2023. There is still debate about whether the recession will be short and mild or long and severe.

What is State of the Economy report?

A State of the Economy report is a paper that the Reserve Bank of India (RBI) releases which gives a summary of how the country’s economy is doing.
The report talks about things like prices going up, how much the economy is growing, how many people have jobs, and the bank’s plan for managing money.
The RBI uses the report to make decisions about interest rates and other economic rules, and it also helps people like economists, investors, and regular citizens understand the economy and make smart choices.

Retail inflation eased: Retail inflation eased to 5.72 per cent in December. In November, the inflation print was 5.88 per cent. The government has mandated the central bank to keep inflation at 4 per cent with a +/- 2 per cent band.
Consumer price inflation within RBI’s upper tolerance limit: The report said the country’s macroeconomic stability is getting bolstered with inflation being brought into the tolerance band. consumer price inflation in the last two months falling within the RBI’s six per cent upper tolerance limit
Hopeful for the fiscal consolidation: It is even hopeful of fiscal consolidation underway at central and sub-national levels and the external current account deficit on course to narrow through the rest of 2022 and 2023. RBI said in a report that they want to keep prices steady at a certain level and bring it down to 4% by 2024.
Narrowing CAD: Lead indicators suggest that the current account deficit is on course to narrow through the rest of 2022 and 2023.
Stock market continue to outperform peers: The country’s stock markets stood out in 2022 and continue to outperform peers on the strength of macroeconomic fundamentals and retail participation.

Views expressed are not of the institution: The report was prepared by RBI’s deputy governor Michael Patra and other RBI officials. The views expressed in the report are of the authors and not of the institution, the report said.
India at a bright spot: Authors said the prospect of India as a bright spot amidst 2023’s encircling gloom is burnished by most recent history and current developments. By cross-country standards, the country’s economy exhibited resilience through 2022 in the face of the triad of shocks war; monetary policy tightening; and recurring waves of the pandemic.
India will be ahead of UK: According to the authors, at current prices and exchange rates, India will still be the 5th largest economy in the world in 2023, worth $3.7 trillion and will be ahead of the UK.

Monetary policy is the macroeconomic policy laid down by the central bank.
It involves the management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
A contractionary policy increases interest rates and limits the outstanding money supply to slow growth and decrease inflation.
During times of slowdown or a recession, an expansionary policy grows economic activity, by lowering interest rates, saving becomes less attractive, and consumer spending and borrowing increase.

Predictions are too optimistic: The report’s release is significant, as it comes before the Union Budget for 2023-24. However, the report’s predictions may be too optimistic.
Risks tilted towards growth than inflation: The balance of risks is currently tilted towards growth rather than inflation, both globally and domestically.
Slowing down the pace of monetary tightening: It is appropriate for the RBI to slow down or pause the pace of monetary tightening. Monetary policy takes time to have an effect, so the impact of these increases may take a few quarters to realise actually.
Wait and Watch Approach: The RBI can afford to adopt a wait-and-watch approach and allow the impact of past actions to be fully felt. This does not mean neglecting inflation, as bringing it down to 4% is still important.

The world is, no doubt, viewing India favourably as an investment destination, both for its large domestic market and the need to de-risk from China in the current geopolitical environment. The government’s focus on improving the country’s physical as well as digital infrastructure is boosting the investors’ confidence. Demonstrating macroeconomic stability and policy credibility can be the icing on the cake to bring the world to India.

Mains question

Q. Highlight RBI’s State of the Economy report and discuss what makes India a favorable investment destination?