A slowdown in personal consumption expenditure, driven by inflation, is moderating corporate sales and holding back private investment in capacity creation, said a Reserve Bank of India paper.

The paper, authored by a team led by RBI deputy governor Michael Debabrata Patra, underlined the need for lowering inflation to revive consumer spending and boost corporate revenues and profitability.

“Bringing down inflation and stabilising inflation expectations will revive consumer spending, boost corporate revenues and profitability, which is the best incentive for private capex,” RBI said in the ‘State of the Economy’ article, published in the central bank’s June bulletin released Friday.

India’s retail inflation, based on the consumer price index (CPI), which averaged 6.7% in 2022-23, is now on the decline and fell to a two-year low of 4.25 in May, following the RBI’s monetary policy actions and government measures. In the June policy, the Monetary Policy Committee (MPC) left the repo rate unchanged at 6.5% for the second time in a row, after lifting it by 250 basis points between May 2022 and February 2023 to tame inflation. 

“Recent national accounts data and corporate results when read in conjunction clearly show that inflation is slowing down personal consumption expenditure. This, in turn, is moderating corporate sales and holding back private investment in capacity creation,” said the article published in the RBI’s latest bulletin.

The RBI, however, said the views expressed in the bulletin articles are of the authors and do not represent the institution’s views.

As per the RBI article, the path to high but sustainable inclusive growth has to be paved by price stability. “Once this is realised, the trade-offs and dilemmas confronting the conduct of monetary policy fade away,” it said.