MUMBAI: The RBI warned on Wednesday that while India’s economy appears capable of weathering deteriorating geopolitical conditions amid the ongoing Russian-Ukrainian war, it faces headwinds from the global fallout from geopolitical tensions, prices commodity prices and the moderation of external demand.
The RBI, however, did not change the GDP growth projection made in April.
It had cut the GDP growth projection for the fiscal year 2022-23 to 7.2% from its previous forecast of 7.8%.
The Monetary Policy Committee (MPC) of the Reserve Bank’s Rate Setting Committee decided to hold an off-cycle meeting on May 2-4 and raised the benchmark lending (repo) rate by 40 basis points and increased the CRR by 50 basis points to contain the rise in inflation.
The MPC’s decision was announced by RBI Governor Shaktikanta Das on Wednesday afternoon.
“I would therefore like to emphasize that our monetary policy actions today, aimed at reducing inflation and anchoring inflation expectations, will strengthen and consolidate the medium-term growth prospects of the economy. We remain mindful of the “Possible short-term impact of higher interest rates on output. Our actions will therefore be calibrated,” the governor said in a statement.
The committee said that in this high-tension global environment, it is useful to take stock of national macroeconomic and financial conditions.
The rebound in domestic economic activity that began with the ebb of the Omicron wave is proving to be more and more general.
“With respect to the outlook for domestic economic activity, the forecast for a normal southwest monsoon improves the outlook for kharif production. The recovery of contact-intensive services is expected to be sustained, with the decline in third wave and increasing vaccine coverage,” the central bank said.
In addition, investment activity should be boosted by robust government investment, improving capacity utilization, stronger corporate balance sheets and favorable financial conditions.
“On the other hand, the deteriorating external environment, high commodity prices and persistent supply bottlenecks pose formidable headwinds, as well as the fallout from the volatility of the normalization of the monetary policy in advanced economies,” the committee said.
Overall, India’s economy appears capable of withstanding deteriorating geopolitical conditions, but it is prudent to continuously monitor the balance of risks, said the six-member panel led by Governor Das.
The Governor also said that while the drivers of domestic economic activity are strengthening, they face headwinds from global fallout in the form of prolonged and heightened geopolitical tensions; high commodity prices; Lockdowns or restrictions related to COVID-19 in some major economies.
The economy is also facing headwinds from slowing external demand and tighter global financial conditions due to monetary policy normalization in advanced economies.
These risks are moving in the direction predicted in the April statement after the MPC meeting and appear to persist, Das said.
