‘economic Revival Likely At Risk From Global Spillovers’: Rbi Report

Written by a group of 20 RBI employees, the article was accompanied by the usual disclaimer that views expressed are those of the authors and do not reflect the views of the organization.

“These gains are, however, at risk from disruptive spillovers from geo-political hostilities as increasingly evident in inflation prints, tightening financial conditions and a terms of trade shock accompanied by portfolio outflows,” the article said. 

The central bank’s monetary policy committee (MPC) on 8 April revised its inflation forecast to 5.7% in 2022-23, up from 4.5% earlier, assuming a normal monsoon this year and an average crude oil price of $100 per barrel. Retail inflation stood at 6.01% in January, 6.07% in February and 6.95% in March, above the MPC’s flexible target. Russia’s attack on neighbouring Ukraine and the ensuing supply chain bottlenecks have led to a rise in global commodity prices, impacting India’s inflation. 

The bulletin on Monday said that India faces these challenges with improving fundamentals and strong buffers and going forward, spurring private investment would be a key thrust area for sustaining durable growth. 

“Most sectors of the economy are reaching or have exceeded pre-pandemic levels. Notably, bank credit has gathered pace and the job market is gathering steam. There is an acceleration in the travel and hospitality sectors. The construction and real estate sector have also registered a pick-up,” it said.

The near-term global outlook, it said, appears grim, caught up in a vortex of geopolitical risks materializing rapidly, strained supply chains and the quickening pace of monetary policy normalization. 

“Emerging market economies are bracing up to contend with swift shifts in risk sentiments and tightening of global financial conditions that could produce real economy consequences which may thwart incipient recoveries or even precipitate rocketing inflation and economic downturns,” it said. 

The Indian economy is not immune to these negative externalities and the surge in commodity prices is already posing inflation risks, especially through the conduit of surging imports, the bulletin said.

“Rapidly widening trade and current account deficits co-existing with portfolio capital outflows weigh on external sustainability, although the strength of underlying fundamentals and the stock of international reserves provide buffers,” it added. 

India, RBI bulletin said, faces these challenges from a position of strength built on broadened vaccine coverage, financial sector resilience, robust export and remittances and fiscal re-prioritization to spur capital spending on infrastructure.