RBI Deputy Governor: War fallout ‘may trigger re-calibration of forecasts’

The breakout of hostilities in Ukraine and its fallout may necessitate a review of India’s growth story, which remains “as weak as it was at the time of the 2013 taper tantrum,” Reserve Bank of India  (RBI) Deputy Governor Michael Patra said.

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“The choice of a bi-monthly meeting cycle for the Monetary Policy Committee (MPC) ensures that this will be done, with all available data arrivals and analytical updates, in the forthcoming meeting in April,” he added. The RBI projected growth at 7.8 per cent in 2022-23. “The recent reverberations of war have tilted the balance of risks downwards,” Patra said, indicating that various factors may trigger re-calibration of forecasts.

“The policy stance has to be carefully calibrated,” he said while addressing the IMC Chamber of Commerce and Industry.

“Clearly, recent geopolitical developments pose an upside risk to these projections and the upcoming meeting of the MPC in April will provide a thorough re-assessment, but the focus of monetary policy on price stability with clear accountability and the government’s proactive responses to keep prices in check provides confidence that India will weather this storm,” he said.

In 2022, India faces similar risks as in 2013 from surging international crude prices and the volume of gold imports, he said. Yet, the external sector is much more viable than it was in 2013. Even with import demand strong on the back of a recovering economy and the average international crude prices currently above $100 per barrel, the current account deficit is expected to remain within 2.5 per cent of GDP, having averaged 1.1 per cent of GDP during 2014-21, he said.

By contrast, ‘Taper 2013’ had been preceded by the current account deficit averaging 3.7 per cent in 2009-13, with a peak of 6.8 per cent in the third quarter of 2012-13.

Patra said geopolitical conflict has drastically altered the global environment and the context in which monetary policy operates. “As investors re-assess risks and sizable reallocations appear imminent, there is no clarity on the direction and magnitude of capital flows for any specific country.”

Meanwhile, persisting global supply chain disruptions, resurgent commodity prices and volatility in financial markets are distracting policy attention from domestic concerns, Patra said.

For India, direct trade and finance exposures in the context of the ongoing conflict are limited. Contagion could, however, impact India through a broader fallout on emerging market economies as an asset class. “The main transmission channel is likely to be global liquidity conditions, which are tightening,” he said.

“If worry were to give way to panic, liquidity, especially US dollar funding, could dry up and markets could malfunction,” he said. With crude oil still above $100 per barrel, new macroeconomic headwinds could be a second channel of contagion. A third channel could be the reassessment of geopolitical risk by markets and investors, which could inflate country-risk premiums, raise the cost of funding for EMEs and reduce investment volumes, he said.

“These factors may trigger re-calibration of forecasts,” he said.

Stress testing baseline forecasts for normal times with extreme initial assumptions to approximate recent developments suggests that India’s recovery from the pandemic may continue to gain strength and traction on the innate strength of macroeconomic fundamentals, but is yet to be broad-based, Patra said.

As regards inflation, international crude prices present an overwhelming risk, though headroom to adjust excise duties can delay the pass through to pump prices. On the other hand, prospects for the easing of food inflation remain bright with record production and buffer stocks, he said.

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