Policymakers have to balance rising prices amid tariffs, currency depreciation, says RBI bulletin

Reserve Bank of India

The Reserve Bank of India’s (RBI) monthly bulletin has said that policymakers have to balance the upward strain on the rising prices due to tariffs and currency depreciation, as well as the downward pressure on inflation from economic slowdown.

“The stubbornness of headline inflation in AEs, along with a sticky core and services inflation, could act as a constraint on monetary policy being used as a tool to counteract the potential slowdown engendered by the tariff war,” RBI bulletin said.

Bulletin further added that Emerging economies remain vulnerable to the contagion effects of these developments through the trade, capital flows and currency depreciation channels.

“Divergence in domestic macroeconomic conditions is also reflected in dissension in policy actions among central banks,” it said.

The bulletin said despite the turbulent global environment, the Indian economy continues to demonstrate resilience because the growth momentum is supported by robust sectoral performance and improving consumption trends.

The Indian economy had recovered in the December quarter to grow at 6.2 percent after sinking to a seven-quarter low of 5.6 percent in the July-September period, data released on February 28 showed.

The third-quarter growth number was a tad below the MC poll median of 6.3 percent but retained the full-year forecast of 6.5 percent, according to second advance estimates. India’s growth had slipped to a near two-year low of 5.6 percent in the second quarter, with the government projecting 6.4 percent growth in the first advance estimate.

Bulletin added that the immediate course of the global economy is likely to be shaped by escalating trade tensions, inflationary pressures stemming from tariffs, and attendant financial market volatility.

Commodity prices have a benign outlook as a baseline case in line with the expected moderation in demand in an environment of growth slowdown. The pass-through of higher tariffs to consumer prices, however, remains a key risk to inflation, which is already exhibiting signs of stubbornness in many Advance Economies.

“Central banks in AEs would have to factor in such pressures while calibrating policy responses in an environment of potential slowdown in growth. EMEs, on the other hand, are likely to record higher growth than their AE counterparts, although capital outflows and potential currency depreciation remain major risks,” Bulletin added.