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Business News/ News / India/  Why RBI is having second thoughts on inflation, growth projections
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Why RBI is having second thoughts on inflation, growth projections

Deputy governor Michael Patra said geopolitical developments pose an upside risk to the RBI of India’s projection for inflation to ease to 4% by the October-December quarter of next fiscal year.

RBI last month has pegged GDP growth in the year beginning April to slow to 7.8%Premium
RBI last month has pegged GDP growth in the year beginning April to slow to 7.8%

The Reserve Bank of India (RBI) may revise its forecast for economic growth and inflation as the Central bank weighs the impact of Russia-Ukraine conflict and soaring crude oil prices.

"India’s growth story remains as weak as it was at the time of the 2013 taper tantrum. The recent reverberations of war have, in fact, tilted the balance of risks downwards," said RBI deputy govenor Michael Patra.

"The breakout of hostilities in Ukraine and its fallout may necessitate a review of growth and inflation projections, Patra said, adding that the choice of a bi-monthly meeting cycle for the Monetary Policy Committee (MPC) ensures that this will be done, with all available data arrivals and analytical updates, in the forthcoming meeting in April.

Patra added that the geopolitical developments pose an upside risk to the RBI of India’s projection for inflation to ease to 4% by the October-December quarter of next fiscal year.

RBI last month has pegged GDP growth in the year beginning April to slow to 7.8% from an 8.9% pace estimated by the government for this year. The RBI also saw full-year inflation easing to 4.5% next fiscal from 5.3% now.

“International crude prices present an overwhelming risk" to inflation, Patra said. "Any spike in prices would still be treated as supply shock at this stage, in a clear signal that monetary policy will continue to be supportive of economic growth."

Oil prices settled higher on Friday but posted their steepest weekly decline since November, as traders assessed potential improvements to the supply outlook that has been disrupted by Russia's invasion of Ukraine.

Crude prices have soared since the invasion, which Moscow calls a "special military operation." This week, futures benchmarks hit their highest levels since 2008, then pulled back sharply as some producing countries signalled they may boost supply.

Brent, which rose over 20% last week, was down 4.8% this week after hitting $139.13 on Monday. US crude recorded a weekly drop of 5.7% after touching a high of $130.50 on Monday. Both contracts last touched these price peaks in 2008.

In the near term, supply gaps are unlikely to be filled by extra output from members of the OPEC and allies, together called OPEC+, given Russia is part of the grouping, Commonwealth Bank analyst Vivek Dhar said.

India’s government is equipped to deal with the inflation risk by cutting excise duties to spare consumers higher pump prices, he said.

While India has a small linkage through trade and direct channels to the ongoing crisis, the potential spillover effects can’t be ruled out, Patra said.

The current-account deficit will remain within 2.5% of gross domestic product and the external sector remains robust, Patra said.

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Published: 12 Mar 2022, 02:25 PM IST
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