Contagion from conflict could spill over into India through broader implications, says RBI’s Patra

The growth story of Mumbai India remains as weak as it was at the time of the 2013 taper tantrum and the recent aftermath of the war [Russia’s invasion of Ukraine] have tipped the risk balance down, Reserve Bank of India (RBI) Deputy Governor Michael Debabrata Patra said on Friday.

dr Noting that the direct trade and financial risks to India from the ongoing conflict are limited, Patra said, “However, contagion could hit India through broader damage to emerging markets as an asset class.”

“The main transmission channel is likely to be tightening global liquidity conditions. If concern gives way to panic, liquidity, particularly US dollar funding, could dry up and markets could fail. With Crude Oil still trading above $100 a barrel, fresh macro headwinds could be a second channel of contagion. A third channel could be the reassessment of geopolitical risk by markets and investors, which could push up sovereign risk premia, raise funding costs for emerging companies and reduce investment volumes,” he added in his keynote address “Taper 2022: Touchdown in turbulence”. the IMC Chamber of Commerce & Industry in Mumbai.

Noting that the RBI forecast economic growth of 7.8% for 2022-23 last month, he said the outbreak of hostilities in Ukraine and its aftermath would likely require a review.

“Choosing a bi-monthly cycle of meetings for the Monetary Policy Committee (MPC) ensures that this will happen … at the upcoming April meeting,” he said.

He said the geopolitical conflict has drastically changed the global environment and the context in which monetary policy operates.

“As investors reassess risks and significant reallocations appear imminent, there is no clarity as to the direction and magnitude of capital flows for any particular country,” he said.

Meanwhile, ongoing global supply chain disruptions, rebounding commodity prices and volatility in financial markets diverted policy attention from domestic concerns.

dr Noting that international crude prices posed an overwhelming risk to the inflation outlook, Patra said there was scope to adjust excise taxes, which in turn could delay the pass-through to pump prices.

“On the other hand, prospects remain good for food inflation to ease with record production and buffer stocks,” he said.

“Strong supply-side interventions and an increase in domestic production can control inflation-sensitive legume and cooking oil prices, although spillovers from the geopolitical situation cannot be ruled out,” he added.

Stressing that policy stance needs to be carefully calibrated, he said monetary policy remains in an accommodative mode and continues to create financial conditions that support growth.

“Although fiscal consolidation is underway, there is still some stimulus in the economy that will last into 2022-23, as estimated by fiscal stimulus,” he said.

“Although the impact of the geopolitical situation will be assessed and fed into our forecasts, it is reasonable to treat it as a supply shock at this stage of monetary policy,” he added.

“Private sector estimates suggest that a rise in crude oil prices to $150 a barrel will shave another 1.6% of global GDP while adding another 2% to global inflation,” noted Dr. patra

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