India faces global challenges from position of strength, says RBI article

India is facing the tremors caused by geopolitical developments from "a position of strength" with improving fundamentals and strong buffers, according to an RBI article.

Broadened vaccine coverage, financial sector resilience, robust export and remittances, and fiscal reprioritisation to spur capital spending on infrastructure are helping India, the article said, adding that going forward, spurring private investment remains a key thrust area for sustaining growth on a durable basis.

The article, published in RBI's April 2022 bulletin, noted that the global economy is in the throes of a geopolitical cataclysm, with heightened uncertainty obscuring the outlook.

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Choked supplies and mounting commodity prices, especially of food and energy, have stoked inflationary pressures, exacerbating policy trade-offs for central banks.

"India too is experiencing tremors from these developments. The fallout of the war and retaliatory sanctions is already evident in inflation prints and balance of payments developments. Nonetheless, some domestic factors provide some measure of comfort," it said.

As India enters Samvat 2079, the third wave of Covid-19 seems to be well behind us, and with the removal of all restrictions alongside a broadening of vaccination coverage, economic activity is returning to speed.

The RBI, however, said views expressed in the article are those of the authors and do not necessarily represent the opinion of the central bank.

The authors said near-term global outlook appears grim, caught up in a vortex of geopolitical risks materialising rapidly, strained supply chains and the quickening pace of monetary policy normalisation.

Emerging market economies are bracing up to contend with swift shifts in risk sentiments and tightening of global financial conditions that could produce real economy consequences which may thwart incipient recoveries or even precipitate rocketing inflation and economic downturns.

"The Indian economy is not immune to these negative externalities," the article said, highlighted that the surge in commodity prices is already posing inflation risks.

Also, rapidly widening trade and current account deficits co-existing with portfolio capital outflows weigh on external sustainability, although the strength of underlying fundamentals and the stock of international reserves provide buffers.

"India faces these challenges from a position of strength built on broadened vaccine coverage, financial sector resilience, robust export and remittances and fiscal reprioritisation to spur capital spending on infrastructure," it said.

On the global setting, it said international commodity prices, which were already on an upward spiral amidst demand-supply imbalances, hardened precipitously in early March 2022 and remained volatile at elevated levels thereafter.

Reflecting the pass-through of high commodity prices, headline inflation in many advanced economies spiked further to new record levels, forcing central banks to hasten unwinding of accommodative monetary policy stances despite rising risks to growth, it added.

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