Indian economy faces headwinds, inflation remains a concern: RBI Governor

The Reserve Bank of India warns that the Indian economy faces headwinds from global developments and omicron variant. Governor Shaktikanta Das said inflation continues to remain a concern due to the build-up of cost pressures.

The central bank highlighted that global growth and trade had begun to lose pace even before the advent of the new variant. Economy growth and trade was averted by formidable headwinds from supply disruptions and bottlenecks. Logistics dysfunctions, high shipping charges and port congestions as well as a shortage in key intermediates are driving factors.

Das said elevated commodity prices have also rendered inflationary pressures persistent across geographies. He believes it poses as a serious risk to global economic prospects.

The RBI said that the government’s fiscal deficit target of 6.8% for the current financial year is likely to come under strain following the second supplementary demand of grants presented in December 2021. On the positive side, it said there is an element of fiscal consolidation as the demand for grants includes the retirement of high-cost payment obligations relating to Air India.

However, the central bank hopes government borrowing to remain within projections. The report also highlighted the IMF’s indication of the likelihood of further downgrades in its projections due to the emergence of the omicron variant. It triggered the worst Black Friday plunge by the Dow Jones and had led to a drop in inflows from foreign portfolio investors.

The report said that after recording net inflows of $7.6 billion during H1:2021-22, net outflows have occurred during Q3:2021-22 so far. And while the economy has expanded beyond the pre-pandemic level, the COVID-19 is adding to inequality. “The pace of recovery remains uneven across sectors, inflation formation is being subjected to repetitive supply shocks and the outlook is overcast with global risks. Omicron haunts near-term prospects.”

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Furthermore, Das said strong supply side measures to contain food and energy prices are helping moderate price risks. He noted that while the pandemic induced bouts of volatility, spillovers and heightened uncertainty are challenging. But the Indian financial system has stood up well and remains well prepared.