Also, as the Monetary Policy Committee noted that the domestic economy is resilient and performing broadly as expected, with India expected to be among the fastest growing economies in 2022-23, the Reserve Bank of India (RBI) expressed concern over the impact of Downward forecasts for global growth and increasing risk of recession for global trade and emerging markets like India.
“Disturbingly, the globalization of inflation coincides with the deglobalization of trade,” RBI Governor Shakkanta Das said, adding that the pandemic and war have ignited tendencies toward greater fragmentation, shifting supply chains and curbing capital flows, all of which pose long-term challenges for RBI will represent both globalization and the world economy.
He said these developments posed a greater risk for emerging markets as they had to contend with both “domestic growth-inflation trade-offs and spillovers from the world’s most synchronized tightening of monetary policy.”
While emerging markets simultaneously face tightening external financial conditions, capital outflows, currency depreciation and reserve losses, India has also experienced $13.3 billion in portfolio outflows in the current fiscal year and its currency has depreciated by over 4 percent in the fiscal year.
Aggravation of external conditions
While emerging markets simultaneously face tightening external financial conditions, capital outflows, currency depreciation and reserve losses, India has also experienced $13.3 billion in portfolio outflows in the current fiscal year and has devalued its currency by over 4% for fiscal purposes.
In its statement, RBI said India’s external sector weathered the storm while navigating recent global spillovers and its merchandise exports rose in April-July 2022. However, she said that “goods imports rose to a record high due to elevated global commodity prices, consequently the goods trade deficit widened to US$100 billion in April-July 2022.” The preliminary data showed that demand for services exports, particularly IT Services, remained buoyant in the first quarter despite global uncertainty.
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As there have been concerns about the current account deficit, Das said it is expected to stay within manageable limits and the RBI has the ability to fund it.
“FX reserves remain strong and the RBI will address excessive volatility in exchange rates,” Das said, adding that they expect relief on the import front as oil and commodity prices soften.
