Global Policy tightening may precipitate rocketing inflation

• Food and beverages inflation was the main driver, rising to 7.5 per cent in March from 5.9 percent in February - the RBI report.

Current Scenario

The Reserve Bank of India (RBI) is cautioning on the ‘grim’ near-term global outlook.

• The surge in commodity prices is already posing inflation risks.
• It is especially through the conduit of surging imports.
• Retail inflation has gone up to 6.95 percent in March.

State of the Economy Report

Rapidly widening trade and current account deficits co-existing with portfolio capital outflows weigh on external sustainability.

• The strength of underlying fundamentals and the stock of international reserves provide buffers.
• India too is experiencing tremors from these (global) developments.
• The fallout of the war and retaliatory sanctions is already evident in inflation prints and balance of payments developments.
• Emerging market economies are embracing risk sentiments and tightening of global financial conditions that could produce real economic consequences.
• It may thwart incipient recoveries or even precipitate rocketing inflation and economic downturns.
• The Indian economy is not immune to these negative externalities.

Steps by the RBI

• The RBI kept the repo rate unchanged in the April policy review and initiated the process of normalization of the accommodative policy.

Things in India’s favor

The near-term global outlook appears grim, caught up in a vortex of geo-political risks materializing rapidly, strained supply chains and the quickening pace of monetary policy normalization.

• India faces these challenges from a position of strength built on:

• Broadened vaccine coverage,
• Financial sector resilience,
• Robust export and remittances
• Fiscal reprioritization to spur capital spending on infrastructure.

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

Conclusion

India enters Samvat 2079, the third wave seems to be behind and, with the removal of all curbs, alongside a broadening of vaccination, economic activity is returning to speed.

• Most sectors are reaching or have exceeded pre-pandemic levels.
• Bank credit has gathered pace and the job market is gathering steam.

Exam Track

Prelims Takeaway

• Retail Inflation
• State of the Economy Report
• Trade and Current account deficit

Mains Takeaway

Q. India’s policies to withstand short term and long term turmoil due to Global events have proven to be more effective than other countries. Analyse.