Patra said geopolitical tensions could cause the RBI to revise its growth projection in the April policy.
The Reserve Bank of India (RBI) will assess inflation in detail in the next monetary policy statement in April, after recent geopolitical tensions posed an upside risk to previous projections, Deputy Governor Michael said on Friday. Debabrata Patra.
He added, however, that monetary policy’s emphasis on price stability and government responses to control prices will get India out of trouble.
In his keynote on “Taper 2022: Touchdown in Turbulence”, Patra said India’s growth is likely to remain weak, as it did during the 2013 crisis, and the recovery is likely to be affected. due to tensions between Russia and Ukraine. Patra said geopolitical tensions could cause the RBI to revise its growth projection in the April policy. The central bank had forecast India’s economy to grow by 7.8% in 2022-23. The third wave of the pandemic had a relatively minor impact as evidenced by high frequency indicators. GDP is expected to grow only 1.8% from pre-pandemic levels, Patra said.
The deputy governor said the era of abundant liquidity was coming to an end, as the world’s central banks sought to shift gears and become bond sellers rather than buyers. The timing of this coordinated central bank balance sheet reduction could not have come at a worse time, as oil prices hit decade highs, he said. While India will not remain unscathed from the turmoil about to be unleashed by some central banks, India’s external sector is better off than it was in 2013, Patra said.
He raised a question that is at the heart of the market’s mind: will central banks shrink enough to control inflation or will they be excessive enough to stifle the global recovery? Patra said multilateral organizations in their baseline scenarios expect global gross domestic product (GDP) to decline by up to 2 percentage points in this year and next. Private sector estimates suggest that if crude oil hits $150 a barrel, it will drop 1.6% of global GDP while raising global inflation by 2%.
“The hawkish tones of systemically important political pivots in early 2022 confirmed financial markets’ worst fears – the era of abundant liquidity is coming to an end. Financial assets, which have been backed by liquidity in valuations strained, are being reassessed,” Patra said.
Although monetary policy always has a national orientation, he explained, its effects tend to ripple through emerging economies and then trickle down to systemically important economies. “It is always easier to enter a dwelling than to leave it.” Highlighting the outcome of the infamous 2013 taper tantrum and its effect on India, which joined the five fragile economies after its currency was minted, Patra argued that India’s external sector will have to bear the brunt of the global fallout.
Even though India’s situation is similar to what it was in 2013, the external sector is still more viable. says Patra. “In 2022, India faces similar risks to 2013 due to soaring international crude prices and the volume of gold imports. Yet the external sector is much more viable than it appears. t was in 2013. Even with strong import demand thanks to a recovering economy and average international crude prices currently above $100 a barrel, the current account deficit is expected to remain below 2.5 percent of the GDP, having averaged 1.1% of GDP during 2014-21 India now has more stable foreign direct inflows in 2022 compared to volatile portfolio inflows that left the country in 2013. “The biggest buffer India has today is its foreign exchange reserves. No country can be immune to the global fallout that a tightening of this magnitude could bring, but a strong external sector can cushion those shocks,” did he declare.
Patra contrasted the current situation with that of 2013 to explain how central bank balance sheets have widened since then over the past two years. This is the biggest difference between yesterday and today. “Before tapering began in 2014, the Fed had expanded its balance sheet by about $3.1 trillion over a 64-month period. In response to the pandemic, the Fed’s balance sheet grew by $3.1 trillion. dollars in the nine months from March to November 2020. It grew by another $1.3 trillion in the 11 months that followed through October 2021 and continued to grow through early March.
Markets reacted to the missile launches in Ukraine, but these externalities have already been seen. Patra, however, warned that there are spinoffs that haven’t been seen before. As commodity prices soar in the aftermath of the war, inflation could undermine household spending and the risk of a global recession could intensify.
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