RBI ‘State of the economy’ report: ‘Global policy tightening may precipitate rocketing inflation’

Cautioning on the ‘grim’ near-term international outlook, the Reserve Bank of India (RBI) on Monday mentioned the surge in commodity costs is already posing inflation dangers, particularly via the conduit of surging imports.

“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,” the RBI mentioned in its ‘State of the economy’ report. Retail inflation has gone as much as 6.95 per cent in March.

Food and drinks inflation was the primary driver, rising to 7.5 per cent in March from 5.9 per cent in February, the
RBI report mentioned. “India too is experiencing tremors from these (global) developments. The fallout of the war and retaliatory sanctions is already evident in inflation prints and balance of payments developments,” the RBI report mentioned. While the RBI stored the repo fee unchanged within the April coverage evaluate, it has initiated the method of normalisation of the accommodative coverage.

According to the RBI, the near-term international outlook seems grim, caught up in a vortex of geo-political dangers materialising quickly, strained provide chains and the quickening tempo of financial coverage normalisation. “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 mentioned.

“The Indian economy is not immune to these negative externalities,” the report mentioned.

India faces these challenges from a place of energy constructed on broadened vaccine protection, monetary sector resilience, sturdy export and remittances and monetary reprioritisation to spur capital spending on infrastructure, it mentioned. “Going forward, spurring private investment remains a key thrust area for sustaining growth on a durable basis,” the report mentioned.

As India enters Samvat 2079, the third wave appears to be behind and, with the removing of all curbs, alongside a broadening of vaccination, financial exercise is returning to hurry, it mentioned. “Most sectors are reaching or have exceeded pre-pandemic levels. Bank credit has gathered pace and the job market is gathering steam…”