Eminent economist Jayanth R Varma on Sunday said the Russia-Ukraine conflict is likely to have adverseeffects on both economic growth as well as inflation and policy makersmust remain alert and ready to respond rapidly to the emerging situation.
Varma, who is also a member of the Monetary Policy Committee (MPC)of the Reserve Bank, in an interview to PTI said inflation is higher than target, though it is within the tolerance band. Listing challenges faced by the Indian economy, Varma said whilethe economy has yet to recover from the cyclical economic slowdown which began around three years ago, investment has remained subduedduring this period, and private consumption has not fully recoveredfrom the pandemic.
"The economy faces new stresses emanating from geopolitical tensions,"he said, adding that inflation is higher than the target though withinthe tolerance band.
Varma, who is a professor of finance and accounting in IIM Ahmedabadsaid: "The conflict is likely to have adverse effects on both economicgrowth and on inflation. Policy makers must in my view remain alertand stand ready to respond rapidly to the emerging situation."
Asia's third-largest economy is projected to grow 8.9 per centin the fiscal year ending March 31, slower than previously anticipated9.2 per cent, according to the recent government data.
"RBI projected 2022-23 inflation to be not much above the targetof 4 per cent, but the degree of confidence in this point estimateis quite low, and there is a non-trivial chance of inflation endingup above the tolerance band."
Varma further noted that the opposite is also true and the possibilityof inflation being much lower than the estimate cannot also be ruled out. He pointed out that the reason why it is so difficult to forecast inflation (both in India and globally) is that supply disruptionshave been a big contributor to rising prices, and it is hard to sayhow long these disruptions will last.
He said the pandemic shifted demand from contact intensive services to goods.
"Consequently, there has been a shortage of goods on the one handand a surplus capacity in services. Relative price changes that makegoods more expensive and services cheaper are one way to rebalancethe economy," the eminent economist opined.
The retail inflation rate breached the 6 per cent upper tolerancelimit of the RBI for the first time in seven months in January, whilethe wholesale-price index stayed in double-digits for the 10th month in a row. The Reserve Bank of India (RBI) on February 10, had lowered theinflation outlook to 4.5 per cent for the next fiscal, from 5.3 percent in the current year, on the assumption of a normal monsoon duringthe year.
RBI's Monetary Policy Committee (MPC) had decided to hold the lendingrate, or the repo rate, steady at 4 per cent, and the reverse repo, or the rate at which it absorbs excess cash from lenders, unchanged at 3.35 per cent.
To a question on taper tantrum, Varma said India is in a much betterposition to cope with US monetary tightening today than it was in 2013.
"The external reserves are comfortable and the current accountdeficit is manageable.
"Moreover, US tightening has been widely anticipated, and investorsin emerging markets have had plenty of time to adjust their strategies to account for this," he observed.
Of course, he said the tightening will still have a major impact on financial markets around the world.
"The dollar has strengthened against most other currencies in recent weeks, and the rupee has also conformed to this pattern," he said, adding that "these price movements are not worrisome".The taper tantrum phenomenon refers to the situation in 2013, when emerging markets witnessed capital outflows and spike in inflation.