Although the MPC emphasized that domestic economic activity is resilient and broadly progressing along its projected lines, with India expected to be among the fastest growing economies during 2022-23, the Reserve Bank of India (RBI) raised its concerns about the impact. From a bearish outlook for global growth and increased downside risks to global trade and emerging economies such as India.
“It is worrying, that the globalization of inflation coincides with the de-globalization of trade,” said Reserve Bank of India Governor Shaktikanta Das, adding that the pandemic and war had sparked trends towards more fragmentation, reconfiguration of supply chains and reduced capital inflows, which would pose long-term challenges for Both globalization and the world economy.
He said these developments pose a greater risk to emerging market economies (EMEs) as they will have to deal with “growth trade-offs, domestic inflation and spillovers from more simultaneous tightening of monetary policy around the world.”
While emerging, small and medium market countries face tightening external financial conditions, capital outflows, currency depreciation and reserve losses simultaneously, India has also seen portfolio outflows of up to $13.3 billion during the current fiscal year, and has seen its currency depreciate by more than about 4 per cent this fiscal year.
Tightening external conditions
While Emerging Market Economies (EMEs) are facing tightening external financial conditions, capital outflows, currency depreciation and reserve losses simultaneously, India has also seen portfolio outflows of $13.3 billion during the current fiscal year and has seen its currency depreciate by more than 4%. Finance.
In its statement, the Reserve Bank of India said that India’s external sector weathered the storm while navigating the recent global fallout and its merchandise exports soared in April and July 2022. However, the bank said: “Merchandise imports soared to set a record high amid soaring global commodity prices. As a result, the merchandise trade deficit widened to $100 billion in April-July 2022.” She said provisional data showed that demand for services exports, especially information technology services, remained high in the first quarter despite global uncertainty.
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As there are concerns about the current account deficit, Das said it is expected to remain within manageable and the Reserve Bank of India has the capacity to fund it.
“Foreign exchange reserves remain strong and the Reserve Bank of India will deal with excessive volatility in exchange rates,” Das said, adding that they expect easing on the import front as oil and commodity prices decline.