As the war in Ukraine continues to vex the global supply chain and inflate prices of goods and commodities, the Indian economy is not expected to remain immune from the negative global conditions, the Reserve Bank of India said in a report. India is facing high inflation, widening trade deficit and foreign portfolio investment outflow, the central bank added. These conditions are expected to hamper growth and lead to ‘rocketing inflation’.
“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 central bank said Monday in its monthly ‘State of the Economy’ report. “The Indian economy is not immune to these negative externalities. The surge in commodity prices is already posing inflation risks, especially through the conduit of surging imports,” it added.
Prices of crude oil prices rocketed to a 14-year high of $133 per barrel in the first week of March, prices of base metals such as nickel, palladium and aluminium, for which Russia is a key exporter, have surged and prices of food items such as edible oil and cereals have also been pinched hard in last two months, following the war. The impact has been felt across the board impacting countries such as the United States, United Kingdom, Brazil, India and Russia.
The latest readings of Consumer Price Index (CPI) inflation and Wholesale Price Index (WPI) inflation reflect a grim prospect. CPI inflation rose to a 17-month high of 6.95 per cent in March, while WPI inflation jumped to a 4-month high of 15.55 per cent in the same month. Economists have indicated that the numbers could heat up further and remain elevated throughout the year. They have also said higher than expected inflation readings would force the central bank to raise interest rates for the first time in three years, in the upcoming June monetary policy meeting.
The RBI said global growth outlook has also been cut due to ongoing conflict in Eastern Europe. Even if the war ends, the imposed sanctions on Russia and the supply chain disruptions will last through this year. This has resulted in organisations like the United Nations Conference on Trade and Development and the Organisation for Economic Co-operation and Development to cut global GDP by 1 per cent.
“India enters Samvat 2079 having crested the third wave of the pandemic with economic activity returning to speed in several sectors. These gains are, however, at risk from disruptive spillovers from geo-political hostilities as increasingly evident in inflation prints, tightening financial conditions and a terms of trade shock accompanied by portfolio outflows,” the central bank said. “India faces these challenges with improving fundamentals and strong buffers. Going forward, spurring private investment remains a key thrust area for sustaining growth on a durable basis,” RBI said.