RBI Cautions: Economy Faces Global Spillover Risks From Ukraine War And Higher Commodity Costs

The RBI on Wednesday cautioned that while the Indian economy appears capable of weathering the deterioration in geopolitical conditions amid the ongoing Russia-Ukraine war, it faces headwinds from global spillovers from geopolitical tensions, elevated commodity prices and moderating external demand.

The RBI, however, did not tinker with the GDP growth projection made in April. It had slashed the GDP growth projection for the fiscal 2022-23 to 7.2 per cent from its earlier forecast of 7.8 per cent.

The Reserve Bank's rate-setting panel Monetary Policy Committee (MPC) decided to hold an off-cycle meeting on May 2 and 4, and raised the benchmark lending rate (repo) by 40 basis points and hiked CRR by 50 basis points to contain the rising inflation.

The MPC decision was announced by RBI Governor Shaktikanta Das on Wednesday afternoon.

"I would, therefore, like to emphasise that our monetary policy actions today – aimed at lowering inflation and anchoring inflation expectations – will strengthen and consolidate the medium-term growth prospects of the economy. We remain mindful of the possible near-term impact of higher interest rates on output. Our actions will, therefore, be calibrated," the governor said in a statement.

The committee said that in this high-voltage global environment, it is useful to take stock of the domestic macroeconomic and financial conditions.

The rebound in domestic economic activity that took hold with the ebbing of the Omicron wave is turning out to be increasingly broad-based.

"As regards the outlook for domestic economic activity, the forecast of a normal southwest monsoon brightens the prospects for kharif production. The recovery in contact-intensive services is expected to be sustained, with the ebbing of the third wave and the growing vaccination coverage," the central bank said.

Also, investment activity should get an uplift from the robust government capex, improving capacity utilisation, stronger corporate balance sheets and congenial financial conditions.

"On the other hand, the worsening external environment, elevated commodity prices and persistent supply bottlenecks pose formidable headwinds, along with volatility spillovers from monetary policy normalisation in advanced economies," the committee said.

On balance, the Indian economy appears capable of weathering the deterioration in geopolitical conditions, but it is prudent to continuously monitor the balance of risks, said the six-member panel headed by the RBI Governor.

The governor also said even as the drivers of domestic economic activity are getting stronger, they face headwinds from global spillovers in the form of protracted and intensifying geopolitical tensions; elevated commodity prices; COVID-19 related lockdowns or restrictions in some major economies.

The economy is also facing headwinds from slowing external demand, and tightening global financial conditions on the back of monetary policy normalisation in advanced economies.

These risks are evolving on the lines anticipated in the April statement after the MPC meeting and appear to be lingering, Mr Das said.