RBI May Revise Growth Projection: Deputy Governor Michael Patra

Patra said geopolitical tensions could prompt the RBI to revise its projection for growth in the April policy.

The Reserve Bank of India (RBI) will assess inflation in depth in its upcoming monetary policy statement in April, following recent geopolitical tensions that have posed an upside risk to the earlier projections, Deputy Governor Michael Debabrata Patra said here on Friday.

However, he added that the focus of monetary policy on price stability and the government’s responses to keep prices under control will take 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 sluggish as it did during the 2013 taper tantrum and the recovery is expected to be hurt by tensions between Russia and Ukraine. Patra said geopolitical tensions could prompt the RBI to revise its projection for growth in the April policy. The central bank had forecast a 7.8% growth of the Indian economy for 2022-23. The third wave of the pandemic had a relatively minor impact, as evidenced by high-frequency indicators. GDP is likely to rise just 1.8% above pre-pandemic levels, Patra said.

The deputy governor said the era of copious liquidity is coming to an end as the world’s central banks gear up and become sellers of bonds instead of buyers. The timing of this coordinated run-down of central bank balance sheets couldn’t have come at a worse time with oil prices hitting a 10-year high, he said. While India will not be 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 posed a question that has been on the minds of the market: will central banks taper down enough to curb inflation or will it be excessive enough to stamp out the global recovery? Patra said that in their base case scenarios, multilateral organizations expect global gross domestic product (GDP) to lose up to 2 percentage points this year and next. Private sector estimates suggest that if crude oil reaches $150/barrel, it will drop 1.6% of global GDP and raise global inflation by 2%.

“Hawkish notes in systemic policy changes in early 2022 confirmed financial markets’ worst fears: the era of copious liquidity is coming to an end. Financial assets, which have been boosted by liquidity to overvalued, are being re-priced,” Patra said.

While monetary policy always has a domestic orientation, he explained, its effects seep into emerging economies and then back again to systemically important economies. “It’s always easier to get into accommodation than to get out.” Referring 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 argued that India’s external sector will suffer the most from global spillovers.

While the situation in India is similar to 2013, the external sector is more viable. said Patra. “In 2022, India will face similar risks as in 2013 from rising international crude prices and the volume of gold imports. Still, the external sector is much more viable than in 2013. Even with strong import demand driven by a recovering economy and the average international crude oil price currently above $100 a barrel, the current account deficit is expected to close within 2 years. .5% stay. of GDP, with an average of 1.1% of GDP in 2014-21. India now has a more stable foreign direct inflow in 2022 compared to the volatile portfolio inflows that left the country in 2013. The biggest 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 absorb these shocks,” he said.

Patra drew a contrast between the current situation and 2013 to explain how central bank balance sheets have grown over the past two years since then. That’s the biggest difference between then and now. “Prior to the start of the 2014 run-down, the Fed had expanded its balance sheet by about $3.1 trillion over a 64-month period. 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. Over the following 11 months to October 2021, it expanded an additional $1.3 trillion and continued to grow through early March.”

The markets reacted to the missile strikes in Ukraine, but these externalities have been seen before. However, Patra warned that there are some spillovers that have not been seen before. As commodity prices skyrocket in the wake of the war, inflation could undermine household spending and increase the risk of a global recession.

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