RBI may review growth projection: Deputy governor Michael Patra


Patra said that the geopolitical tensions may make the RBI review its projection on growth in the April policy.

The Reserve Bank of India (RBI) will thoroughly assess inflation in the upcoming monetary policy statement in April, after the recent geopolitical tensions which posed an upside risk to the earlier projections, deputy governor Michael Debabrata Patra said here on Friday.

He, however, added that the focus of monetary policy on price stability and the government’s responses to keep prices in check will bring India out of a difficult situation.

In his keynote address on ‘Taper 2022: Touchdown in Turbulence,’ Patra said India’s growth is likely to remain weak as it did during the 2013 taper tantrum and recovery is expected to be hurt due to tensions between Russia and Ukraine. Patra said that the geopolitical tensions may make the RBI review its projection on growth in the April policy. The central bank had projected a 7.8% growth of the Indian economy in 2022-23. The third wave of the pandemic had a relatively minor impact as reflected in high-frequency indicators. GDP is likely to rise only 1.8% above pre-pandemic levels, Patra said.

The deputy governor said the age of abundant liquidity is coming to an end, as the world’s central banks look to shift gears and turn into sellers of bonds rather than purchasers. The timing of this coordinated tapering of central banks’ balance sheets could not have come at a worse time, when oil prices have hit decadal highs, he said. While India will not remain unscathed by the turmoil about to be unleashed by some central banks, India’s external sector is better off than it was in 2013, Patra said.

He raised a question that is on top of the market’s mind: Will central banks taper enough to tame inflation or will it be excessive enough to snuff out global recovery? Patra said multilateral organisations in their baseline scenarios expect that the global gross domestic product (GDP) may lose up to 2 percentage points over this year and next. Private sector estimates suggest that if crude oil reaches $150/bbl, it will knock off 1.6% global GDP while raising global inflation by 2%.

”Hawkish tones in systemically important policy pivots in early 2022 confirmed the worst fears of financial markets – the age of abundant liquidity is drawing to a close. Financial assets, which were buoyed by liquidity into stretched valuations, are being repriced,” Patra said.

While monetary policy always has domestic orientation, he explained, its effects tend to spill over into emerging economies and then spill back to systemically important ones. “It is always easier to go into accommodation than to come out.” Pointing to the outcome of the famous taper tantrum of 2013 and its effect on India, which joined the fragile five economies after its currency was battered, Patra maintained that India’s external sector will have to bear the brunt of global spillovers.

Even though India’s situation is similar to what it was in 2013, yet the external sector is more viable. Patra said. “In 2022, India faces similar risks as in 2013 from surging international crude prices and the volume of gold imports. Yet, the external sector is much more viable than it was in 2013. Even with import demand strong on the back of a recovering economy and the average international crude prices currently above $100 per barrel, the current account deficit is expected to remain within 2.5% of GDP, having averaged 1.1% of GDP during 2014-21. India now has more stable foreign direct inflows in 2022 compared with the volatile portfolio inflows that left the country in 2013. The greatest buffer India has today is its forex reserves. No country can be immune to the global spillovers that a tightening of this magnitude could lead to but a strong external sector can cushion these shocks,” he said.

Patra drew a contrast between the current situation with that of 2013 to explain how the balance sheets of central banks since then have expanded over the last two years. That is the biggest difference between then and now. “Before the commencement of the 2014 taper, the Fed had expanded its balance sheet by around $ 3.1 trillion over a period of 64 months. In response to the pandemic, the Fed’s balance sheet has expanded by $3.1 trillion in the nine months from March to November 2020. It expanded another $1.3 trillion in the ensuing 11 months up to October 2021 and continued to grow till early March.”

The markets reacted to the missile strikes in Ukraine, but these externalities have been seen before. Patra, however, warned that there are some spillovers that have not been seen before. As commodity prices go through the roof in the aftermath of the war, inflation could sap household spending and the risk of a global recession could intensify.


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