Cautioning that the ongoing Russia-Ukraine war has the potential to derail the global economy, the Reserve Bank on Friday slashed its economic growth projection to 7.2 per cent amid volatile crude oil prices and supply chain disruptions. The Central bank also projected a higher trajectory for inflation (5.7%) in the backdrop of already rising prices of consumer goods.
Earlier this year, the economic survey in January had projected a growth rate of 8-8.5 per cent for the current fiscal.
The RBI on Friday kept the benchmark interest rate, repo — at which it lends short-term money to banks — unchanged at 4 per cent.
“As we were emerging out of the pandemic situation, the global economy has seen tectonic shifts beginning February, 24 with the commencement of the war in Europe, followed by sanctions and escalating geopolitical tensions,” RBI Governor Shaktikanta Das said
“Once again, we in the RBI stand resolute and in readiness to defend the economy and navigate out of the current storm,” he added.
Detailing the first bi-monthly monetary policy review of the current fiscal, the Governor said external developments during the past two months have led to the materialisation of downside risks to domestic growth and upside risks to inflation.
“...Real GDP growth for 2022-23 is now projected at 7.2 per cent with Q1:2022-23 at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4 per cent, assuming crude oil (Indian basket) at USD 100 per barrel during 2022-23,” Das said, adding that the Indian economy is steadily reviving from its pandemic-induced contraction.
“We are confronted with new but humungous challenges — shortages in key commodities; fractures in the international financial architecture; and fears of deglobalisation. Extreme volatility characterises commodity and financial markets. While the pandemic quickly morphed from a health crisis to one of life and livelihood, the conflict in Europe has the potential to derail the global economy,” Das said in his monetary policy statement.
Pointing out that with the easing of restrictions domestic air passenger traffic rebounded in March, the RBI Governor said that consumer confidence is improving and households’ optimism in outlook for the year ahead has strengthened with an uptick in sentiments.
Going forward, robust rabi (winter crop) output should support the recovery in rural demand, while a pick-up in contact-intensive services should help in further strengthening urban demand, he added.
He said the RBI will focus on ensuring that inflation remains within the target going forward while supporting growth. Retail inflation is hovering above the RBI’s upper tolerance level for the past couple of months. It was 6.07 per cent in February and 6.01 per cent in January, mainly due to an uptick in food prices.
“Overall, the external developments during the past two months have led to the materialisation of downside risks to the domestic growth outlook and upside risks to inflation projections presented in the February MPC resolution. Inflation is now projected to be higher and growth lower than the assessment in February,” the RBI said.