The world faces another storm, but the domestic economy is resilient, Governor Shaktikanta Das opened his post-policy press this afternoon, listing the third shock the global economy is facing after the pandemic and the Ukraine war.
Earlier in the day, the RBI-led Monetary Policy Committee announced the third straight repo rate hike of 50 basis points, taking policy rates up a total of 190 basis points to 5.90 percent – the highest level since April 2019 and according to all indications they are not ready yet as inflation remains well above its tolerance level for the eighth straight month.
But earlier in the day, MPC-RBI cut growth forecast for the second time to 7 percent – down from 7.8 percent in April and 7.2 percent in August.
“In the last two and a half years, the world has experienced two major shocks – the Covid-19 pandemic and the conflict in Ukraine. These shocks are having a profound impact on the global economy. As if that wasn’t enough, we are now in the midst of a third major shock — a storm — arising from aggressive monetary policy action and even more aggressive communication from advanced-economy central banks like the Federal Reserve,” Das said in his keynote address.
While the need for such measures will be determined by their domestic considerations, in a highly integrated global financial system they will inevitably cause adverse externalities through global spillovers, and we in emerging markets will suffer the consequences, Das said, adding, however, “We are doing them.” not responsible for how they respond to their domestic imperatives, and we need to address the spillovers.” He noted that recent sharp rate hikes and the forecast for further rate hikes have exacerbated financial conditions, extreme volatility and risk aversion, and said all segments of the financial market, including stocks, bonds and currencies, are in turmoil around the world. The financial markets are nervous, with possible consequences for the real economy and financial stability.
“The global economy is in the eye of a new storm,” Das reiterated.
However, the governor sounded upbeat on the domestic economy, although on a more cautious note he said: “Amid this worrying global environment, our economy remains resilient. There is macroeconomic stability, our financial system remains intact, with improved performance parameters. We have weathered the shocks of the pandemic and the Ukraine conflict.”
That said, when currencies are in freefall, imported inflation is an inevitable eventuality and the world is now facing the same thing, and our price forecast plays into that aspect. The third shock was compounded by advanced-economy central banks raising interest rates precipitously and forecasting sharper rate hikes that had already roiled global financial markets and created excessive volatility in global currency markets.
Despite this optimism, the RBI lowered its GDP forecast to 7 percent for the current fiscal year (from 7.2 percent in June and 7.8 percent in April), citing global headwinds stemming from the ongoing Ukraine war and aggressive tightening monetary policy enforces worldwide -decade of high inflation throughout the western world.
On the back of how confident the central bank is that the economy is at 7 percent, Deputy Governor Michael Patra said barring the negative Q1 surprise, we believe the latest NSO number/forecast. “We also see that all high-frequency indicators are gaining traction and we hope that the economy will maintain current momentum in the second half.” On the economy, he said, while real GDP growth in the first quarter turned out to be lower than our expectations 15.6 percent vs. 13.5 percent, the late recovery in Kharif seeding, comfortable reservoir levels, improving capacity utilization, buoyant bank lending expansion (16.5 percent at last reading) and the government’s continued push capital expenditures are expected to support aggregate demand and production in H2.
RBI will continue to fine-tune liquidity in both directions to allay fears of any tight liquidity conditions and ensure adequate liquidity as the economy enters the credit crunch, Das said.
“Liquidity is not scarce at all. Net LAF has had a surplus of around Rs 5 crore for more than the last two years, excluding two to three primary dealers when their LAF had a crisis. But let me assure you, don’t worry about tight cash. We will continue to keep the system sufficiently liquid,” said Das.
His deputy Patra added that banks are holding excess CRR and SLR and continue to withdraw from them as loan demand outpaces deposit mobilization. Also, there is a temporary shift of liquidity out of the system and moved to another basket due to high GST and direct tax collections in September. Also, the center and states typically spend a lot more starting in the second quarter and into the second half.
“We expect liquidity to normalize itself in October as the current tightness reflects balance sheet adjustments by companies,” Patra said.
(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)