The Reserve Bank of India has flagged several risks to India’s economic outlook, ranging from elevated global energy prices and geopolitical tensions to El Nino conditions and a broadening of domestic inflation pressures.
The risks were highlighted as the Monetary Policy Committee raised the repo rate by 25 basis points to 5.50% and shifted its policy stance from neutral to calibrated tightening.
Here are five key risks highlighted by Sanjay Malhotra.
Higher international oil prices are a major concern for the as they can feed into domestic inflation and raise input costs across the economy.
Malhotra said global inflation is expected to rise sharply due to escalating energy and food prices.
The RBI’s inflation projections also take into account continued volatility in international oil prices.
The RBI is also concerned about the impact of deficient and uneven rainfall and strong El Nino conditions on agriculture and rural demand.
Malhotra said the weak south-west monsoon, along with strong El Nino conditions, could affect the upcoming Rabi season and urban demand.
Food prices have already started showing broader pressure, with the RBI noting increases across several commodities.
The global financial environment remains another risk.
Lingering trade uncertainty, rising bond yields in advanced economies and an appreciating US dollar are keeping global financial markets “nervous and fragile”, Malhotra said.
Further tightening in global financial conditions could put pressure on emerging markets, including India.
The RBI also flagged geopolitical tensions, uncertainty around global trade and supply-chain disruptions.
“Global headwinds from protracted geopolitical tensions, elevated international commodity prices, additional frictions in global trade, and tightening of global financial conditions may weigh on growth outlook,” Malhotra said.
The unresolved West Asia conflict was also listed among the downside risks to the global economic outlook.
The RBI is particularly concerned that inflation may be spreading beyond a few supply shocks.
The weighted share of CPI items recording inflation above 4% increased to about 37% in August. The central bank also noted early signs of inflation becoming more generalised, including higher core inflation.
“There is some evidence of elevated inflation expectations and generalisation of inflation,” Malhotra said.
At the same time, he noted that there were limited signs of supply-side pressures becoming embedded in firms’ pricing behaviour.
The RBI’s decision to raise rates and shift its stance to calibrated tightening reflects its attempt to contain these risks while maintaining the momentum of the Indian economy.