Geopolitical hostilities to supply chain pressures – Here’s what RBI is worrying about

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NEW DELHI: The Reserve Bank of India on Monday released the April 2022 issue of its monthly bulletin in which the central bank highlighted the increasing risks from geopolitical factors to economic growth.

The RBI, which earlier this month, held the benchmark policy repo rate steady at its current record low of 4 per cent, has acknowledged significant upside risks to inflation by sharply increasing its forecast for consumer prices going ahead.

The major risk factor to India’s inflation emanates from the surge in global commodity prices – particularly that of crude oil – since Russia’s invasion of Ukraine in late February.

Global crude oil prices registered a rise of over 20 per cent in the period between the RBI’s February policy and the statement this month.

Meanwhile, the central bank had also reduced its GDP forecast for the current financial year to 7.2 per cent from 7.8 per cent earlier.

Following are key takeaways from the RBI’s April 2022 Bulletin.

GLOBAL SPILLOVER DISRUPTION

In its State of the Economy article, the RBI said that while India’s economic growth was returning to speed in several sectors after the third wave of the COVID-19 pandemic, these gains were at risk from geopolitical hostilities.

“…Increasingly evident in inflation prints, tightening financial conditions and a terms of trade shock accompanied by portfolio outflows,” the article said.

CPI inflation rose to a 17-month high of 6.95 per cent in March, well above the RBI’s comfort band of 2-6 per cent, while foreign portfolio investors have been large sellers of Indian equities so far in 2022, with net sales of over Rs 1 lakh crore.

Meanwhile, yields on benchmark government securities, which determine the pricing of a vast variety of credit products, have surged in 2022.

“Going forward, spurring private investment remains a key thrust area for sustaining growth on a durable basis.”

SUPPLY CHAIN PRESSURES

An index of Indian supply chain pressures based on domestic and global variables from March 2005 to March 2022, has shifted upwards from May 2021, reflecting supply disruptions in the semiconductor sector, congestions in inbound port traffic movements and delivery delays in the US.

“These recent readings warrant careful monitoring of supply chain pressures,” an article in the Bulletin said.

The index predicts industrial production, GDP and input costs and displays lead indicator properties in respect of export volumes and inflation.


BETTER RATE TRANSMISSION BY BANKS


According to an article in the Bulletin, banks’ monetary transmission to lending and deposit rates has shown improvement under the External Benchmark Linked Lending Rate Regime.

This has been facilitated by the accommodative monetary policy stance, abundant liquidity and muted credit demand, the article said.

“Banks have extended the benefits to existing borrowers by reducing the Weighted Average Lending Rate (WALR) more than the repo rate cuts during the EBLR period.”

Going forward, the share of loans linked to external benchmarks is expected to rise further along with a corresponding decline in internal benchmark linked loans and coupled with shorter reset period, the rate transmission to banks’ interest rates can be expected to strengthen further, the article said.


RESERVE BUFFER COMFORT


In line with most emerging market economies, India was the recipient of substantial capital inflows during FY20 and FY21 and currently the RBI’s foreign exchange reserves are at a formidable $604 billion.

The accumulation of reserves reduces the probability of a currency crisis as well as leading to lower cost of foreign currency borrowings, given the increase in the country’s reserve cover for imports, an article in the Bulletin said.

“The intangible benefits of reserves such as external sector stability, lower exchange rate volatility, better sovereign rating and lower cost of borrowing, indicate that the effective cost of holding reserves may be lower/overstated.”



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