RBI Bulletin | Indian economy resilient despite global headwinds

The Indian economy remains resilient despite "formidable" global headwinds and fears of recession, the Reserve Bank of India said in its monthly bulletin released on July 16.

“Knock-on effects of geopolitical spillovers are visible in several sectors, tapering the pace of recovery,” the RBI said. “In spite of this overwhelming shock, there are sparks in the wind that ignite the innate strength of the economy and set it on course to becoming the fastest growing economy in the world, though besieged it might be by fears of recession.”

There have been fears of recession in the US amid aggressive policy tightening by the Federal Reserve. Price pressures are accelerating in the US despite the Fed’s interest rate hikes and efforts to scale back pandemic-era liquidity surplus. Inflation in the US rose to a 41-year high of 9.1 percent from a year ago in June -- higher than estimates and way above the Fed’s target of 2 percent.

Now, the odds are that the Fed could ramp up its battle to anchor inflation expectations and may go in for a 100 basis points (bps) rate hike this month, from the earlier expectations of a 75 bps hike. The Fed policy meeting is scheduled for July 26-27.

Not just the Fed, global central banks are tightening to quell inflation. That apart, geopolitical spillovers from the fallout of the Russia-Ukraine war and elevated commodity prices pose separate risks.

Retail inflation in India fell slightly to 7.01 percent as against 7.04 percent in May. The latest number means headline retail inflation has now spent 33 consecutive months above the medium-term target of 4 percent and six straight months above the 6 percent upper-bound of the 2-6 percent tolerance range.

The RBI’s monthly bulletin said that the biggest source of relief is from India’s inflation coming off its recent peak, albeit at an elevated level still.

The recent revival of the southwest monsoon and rejuvenation of sowing activity has raised hopes of another bountiful year for agricultural activity, raising expectations that rural demand will soon catch up with urban spending and consolidate the recovery, the central bank said.

The signs of its generalisation and the potential unhinging of inflation expectations have elicited a pre-emptive and frontloaded monetary policy response, said the RBI. If the commodity price moderation witnessed in recent weeks endures alongside the easing of supply chain pressures, the worst of the recent surge in inflation will be left behind, enabling the Indian economy to “escape the global inflation trap and enjoy the fruits of the ebullient supply response that is taking place.”

Still, a close and continuous monitoring of the widening trade deficit and portfolio outflows is warranted, notwithstanding strong reserve buffers, the central bank said. There is also need to moderate external debt and ensure a fairly valued exchange rate that has wilted less in the face the monotonic strengthening of the US dollar than many peers, the RBI added.