Mumbai: The Reserve Bank of India (RBI) issued a cautionary note on Wednesday, highlighting the Indian economy’s apparent ability to navigate the challenges arising from deteriorating geopolitical conditions due to the ongoing Russia-Ukraine conflict. However, it noted that the economy is exposed to potential headwinds stemming from global repercussions linked to geopolitical tensions, elevated commodity prices, and a decrease in external demand.
The RBI maintained its GDP growth projection from April and refrained from making adjustments. In April, it had revised the GDP growth projection for the fiscal year 2022-23 to 7.2 percent from its previous estimate of 7.8 percent.
The Monetary Policy Committee (MPC) of the Reserve Bank convened an off-cycle meeting on May 2 and 4, during which it decided to increase the benchmark lending rate (repo) by 40 basis points and raise the Cash Reserve Ratio (CRR) by 50 basis points, aimed at curbing rising inflation.
RBI Governor Shaktikanta Das announced the MPC’s decision on Wednesday afternoon, affirming that the monetary policy actions taken were aimed at reducing inflation and anchoring inflation expectations, ultimately bolstering the economy’s medium-term growth prospects. He acknowledged the potential near-term impact of elevated interest rates on output and emphasized that future actions would be measured and balanced.
Against the backdrop of a challenging global landscape, the committee deemed it essential to assess the domestic macroeconomic and financial conditions.
Following the receding impact of the Omicron wave, a broad-based revival in domestic economic activity is becoming increasingly evident. The anticipation of a normal southwest monsoon is projected to positively impact kharif production. The recovery of contact-intensive services is expected to endure as the third wave subsides and vaccination coverage expands. Additionally, investment activity should gain traction from robust government capital expenditure, improved capacity utilization, strong corporate balance sheets, and favorable financial conditions.
However, the committee highlighted significant challenges, including an adverse external environment, heightened commodity prices, and persistent supply bottlenecks, alongside volatility spillovers from monetary policy adjustments in advanced economies. Despite these obstacles, the panel expressed confidence in India’s ability to withstand the impact of deteriorating geopolitical circumstances, while emphasizing the need for ongoing risk assessment.
Governor Das emphasized that although the driving forces of domestic economic activity are gaining momentum, they are also vulnerable to external pressures such as prolonged and escalating geopolitical tensions, elevated commodity costs, COVID-19-related restrictions in major economies, reduced external demand, and tighter global financial conditions due to monetary policy normalization in advanced economies.
These risks align with the expectations outlined in the April statement following the MPC meeting and appear to be persisting. The committee, led by Governor Das, stressed the importance of continuous vigilance and risk management.
