Kolkata: Reserve Bank of India's monetary policymakers said a prolonged West Asia conflict could cast a long shadow on economic growth and inflation, although the macroeconomy is resilient enough to absorb such shocks.
The possible downside risks to economic growth and upside risks to inflation took the centrestage at the policy discussions earlier in the month when members of the monetary policy committee decided to wait and watch to avoid any policy misstep until clarity emerged on the geopolitics and voted in favour of a status quo, minutes of the April monetary policy meeting showed.
The minutes were published Wednesday.
The members also expressed concerns over the El Nino impact on inflation.
"If the conflict remains unresolved for a long duration, it can make the task of central banks arduous in their endeavour to rein in inflation expectations while minimising growth sacrifice," RBI governor Sanjay Malhotra said at the meeting.
The attack on Iran started on February 28 following which the Middle East nation stopped the Strait of Hormuz for cargo movement leading to a spurt in crude prices. As things stand now, Iran blocked Hormuz again after a brief period of allowing cargo movement.
On April 8, while announcing the status quo on policy rate, Malhotra had said that supply chain disruptions may take longer to subside fully and restore the logistics network, pose downside risks to growth and upside risks to inflation. "Nevertheless, the Indian economy is on a much stronger footing at the current juncture than at any time before to withstand these shocks," he said.
External MPC member Ram Singh and RBI's Indranil Bhattacharyya, too, expressed concerns about the duration of the conflict.
"While the direction of impacts of the West Asia conflict and El Nino disturbances on growth and inflation is clear, the quantum of impact will depend on how long it lasts. The overall effects on growth and inflation are expected to be highly sensitive to the duration of the conflict," Singh said.
He expects inflation pressures to subside to manageable levels if a swift resolution can be arrived at, even as India's fiscal and administrative measures are limiting the passthrough of higher crude oil prices.
Commenting on the global economy as a whole, Bhattacharyya said that the macroeconomic impact of the conflict would depend on its longevity, scale and the subsequent pace and timeline for normalisation of global supply chains. A subdued global demand would impact India's export sector.
"With the weak global economy affecting the growth of exports and crude prices pushing the import bill, the current account deficit, which has stayed in the comfortable range of 1.5% of GDP in the past, is likely to worsen," external MPC member Nagesh Kumar said.
In the April policy, RBI projected India's real GDP growth for FY27 at 6.9%, lower than the 7.6% in FY26 as the geopolitical conflict could likely shift the Indian growth-inflation trade-offs from a Goldilocks state observed in February.
The West Asia conflict posed challenges to the Indian economy through a number of channels – exports, supply of critical commodities, elevated energy and other commodity prices, remittances, uncertainty and subdued global demand.
"I feel that under the circumstances, central banks need to continue to play a conducive role in supporting the productive requirements of the economy. Constant vigil is warranted while waiting to ascertain the persistence of the supply shock, if any," deputy governor Poonam Gupta remarked.
Citing forecasts by private meteorological organisations, external committee member Saugata Bhattacharya said that likelihood of a hotter summer and the likely onset of El Nino might add to the ongoing supply shocks.
"The risks of a policy mistake have heightened amidst this uncertainty. Arguments for increasing the policy rate in anticipation of higher inflation are as risky as cutting rates in response to a fear of lower growth," he said.
Deputy governor Gupta said that a large part of the projected increase in inflation is due to the base effect, and higher oil prices. The projected inflation is more benign when food, fuel and volatile precious metals are stripped out from headline inflation, she added.
The possible downside risks to economic growth and upside risks to inflation took the centrestage at the policy discussions earlier in the month when members of the monetary policy committee decided to wait and watch to avoid any policy misstep until clarity emerged on the geopolitics and voted in favour of a status quo, minutes of the April monetary policy meeting showed.
The minutes were published Wednesday.
The members also expressed concerns over the El Nino impact on inflation.
"If the conflict remains unresolved for a long duration, it can make the task of central banks arduous in their endeavour to rein in inflation expectations while minimising growth sacrifice," RBI governor Sanjay Malhotra said at the meeting.
The attack on Iran started on February 28 following which the Middle East nation stopped the Strait of Hormuz for cargo movement leading to a spurt in crude prices. As things stand now, Iran blocked Hormuz again after a brief period of allowing cargo movement.
On April 8, while announcing the status quo on policy rate, Malhotra had said that supply chain disruptions may take longer to subside fully and restore the logistics network, pose downside risks to growth and upside risks to inflation. "Nevertheless, the Indian economy is on a much stronger footing at the current juncture than at any time before to withstand these shocks," he said.
External MPC member Ram Singh and RBI's Indranil Bhattacharyya, too, expressed concerns about the duration of the conflict.
"While the direction of impacts of the West Asia conflict and El Nino disturbances on growth and inflation is clear, the quantum of impact will depend on how long it lasts. The overall effects on growth and inflation are expected to be highly sensitive to the duration of the conflict," Singh said.
He expects inflation pressures to subside to manageable levels if a swift resolution can be arrived at, even as India's fiscal and administrative measures are limiting the passthrough of higher crude oil prices.
Commenting on the global economy as a whole, Bhattacharyya said that the macroeconomic impact of the conflict would depend on its longevity, scale and the subsequent pace and timeline for normalisation of global supply chains. A subdued global demand would impact India's export sector.
Cost Hurdles
"Merchandise exports are likely to get affected by logistics disruptions, rising freight and insurance costs," Malhotra said, while the services exports and recent trade agreements are expected to provide support."With the weak global economy affecting the growth of exports and crude prices pushing the import bill, the current account deficit, which has stayed in the comfortable range of 1.5% of GDP in the past, is likely to worsen," external MPC member Nagesh Kumar said.
In the April policy, RBI projected India's real GDP growth for FY27 at 6.9%, lower than the 7.6% in FY26 as the geopolitical conflict could likely shift the Indian growth-inflation trade-offs from a Goldilocks state observed in February.
The West Asia conflict posed challenges to the Indian economy through a number of channels – exports, supply of critical commodities, elevated energy and other commodity prices, remittances, uncertainty and subdued global demand.
Lucky Strike
Just before the policy meeting, a temporary ceasefire was announced. "In such a situation, it is prudent to wait and watch, before making any decisive move," the RBI governor said."I feel that under the circumstances, central banks need to continue to play a conducive role in supporting the productive requirements of the economy. Constant vigil is warranted while waiting to ascertain the persistence of the supply shock, if any," deputy governor Poonam Gupta remarked.
Citing forecasts by private meteorological organisations, external committee member Saugata Bhattacharya said that likelihood of a hotter summer and the likely onset of El Nino might add to the ongoing supply shocks.
"The risks of a policy mistake have heightened amidst this uncertainty. Arguments for increasing the policy rate in anticipation of higher inflation are as risky as cutting rates in response to a fear of lower growth," he said.
Deputy governor Gupta said that a large part of the projected increase in inflation is due to the base effect, and higher oil prices. The projected inflation is more benign when food, fuel and volatile precious metals are stripped out from headline inflation, she added.
