RBI Warns Of Inflation Risks From Geopolitical Conflicts, Climate Shocks

Commodity prices volatility, emanating from frequent bouts of geopolitical conflicts, alongside the incidence of climate shocks poses risk to the inflation outlook, the RBI said in its annual Financial Stability Report, published on Thursday.

The Indian economy and the financial system continue to exhibit robust growth and greater resilience, strengthened by solid macroeconomic fundamentals and healthy balance sheets of financial institutions, it said.

Amid an uncertain international economic and financial environment, the Indian economy is exhibiting resilience and remains the fastest growing major economy, the report said. India’s contribution to global growth is rising and currently stands at 18.5% in FY24, it added.

Real GDP growth is on a rising trajectory, supported by macroeconomic and financial stability. Inflation is moderating, albeit at an uneven pace, fiscal consolidation is underway and the external sector position is improving in spite of global spillovers. The domestic financial system is well-buffered with strong capital and liquidity ratios, declining levels of asset impairment and rising profitability, according to the RBI report.

There are several positives in the near-term economic outlook, the RBI said. First, domestic demand conditions are strengthening, and business optimism is at its highest among major economies of the world. Second, the government’s sustained focus on capital expenditure should crowd-in more private investment through multiplier effects. Third, firms are utilising high profit to augment investible resources while bringing down leverage. Fourth, real estate activity is gathering pace, which alongside public investment on infrastructure, is driving a construction activity cycle. Fifth, exports of services are rising and their prospects remain bright. Finally, credit growth is deepening, supported by healthier bank balance sheets.

Downside risks to this outlook stem from global slowdown and spillovers, geopolitical risks and their impact on supply conditions and commodity prices, slack in the rural economy and uncertainties related to weather conditions.

For merchandise trade, outlook would be conditioned by the strength of global demand, movements in commodity prices and freight costs, supply chain pressures, especially in major trading routes. Traffic on the Suez Canal—which is crucial for India’s trade with European and North African markets—has more than halved since the Red Sea crisis, forcing rerouting of ships via Cape of Good Hope and increase in transit times as well as concentration of ships on certain critical ports.