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RBI Dy Governor Michael Patra


The escalation of geopolitical tensions due to the Russia-Ukraine war delivered a brutal blow to the global economy, including supply chain and logistics disruptions, elevated inflation and bouts of financial market turbulence, Reserve Bank of India Deputy Governor Michael Patra said on Friday.

“Emerging market and developing economies (EMDEs) are bearing the brunt of these geopolitical spillovers as I speak, despite being bystanders. Capital outflows and currency depreciations have tightened external funding conditions, and along with elevated debt levels, put their hesitant and incomplete recoveries in danger,” said Patra, addressing an event by industry body PHD Chamber of Commerce.

Patra added that heightened volatility in financial markets and surges in prices of commodities — especially of energy, metals, grain futures and fertilisers — have accentuated risks to growth, inflation and financial stability.

“Like other emerging market economies (EMEs), India too faces major risks, the immediate ones being soaring crude prices and tightening financial conditions. Spillovers in the form of large and sudden swings in financial markets, portfolio capital outflows and supply chain disruptions resulting in shortages of key intermediates, are clouding the outlook,” Patra said.

He added that while the external sector is reasonably well-buffered with a high-level of reserves and a modest current account deficit, it is prudent to be watchful about the rising intensity and scale of headwinds from the geopolitical conflict which could be overwhelming for all EMEs, including India.

“Global economy is seeing the most coordinated monetary policy tightening cycle ever seen,” Patra said, adding that the RBI is trying to stabilise the price situation when the economy is able to bear it.

In a span of two months, the projection of real GDP growth was revised downwards by 60 basis points to 7.2 per cent for 2022-23 while the CPI inflation projection for the year was raised by 120 basis points to 5.7 per cent. These adjustments to the projections can be regarded as the first authentic assessment of the toll that geopolitical spillovers are expected to take on the Indian economy.

By the June 2022 meeting of the MPC, it was clear that risks were materialising faster than anticipated in inflation prints, with three-fourth of the consumer price index (CPI) under siege. In that meeting, therefore, the inflation projection for 2022-23 was raised by another 100 basis points to 6.7 per cent.

“As I stated in my minutes in the June 2022 MPC meeting, the accountability mechanism enhances credibility in the monetary policy framework, especially in its commitment to re-align inflation with its target in the event of prolonged divergences and that is of paramount importance. The wide public sensitivity to accountability works in the same direction as monetary policy in the pursuit of ensuring price stability” Patra said.

Although India’s merchandise exports have stayed above $30 billion over the past 15 months, there has been a moderation in pace in May 2022, reflecting the renewed supply chain disruptions in the wake of the war. Yet, bucking the global decline, India registered robust growth in manufacturing export orders. Import growth is broad-based, taking the trade deficit to its highest monthly level in May 2022, but this is an indication that the recovery in domestic economic activity is gathering strength, Patra added.

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