The RBI Committee on the 7th of April presented the Monetary Policy and showcased where the projections are taking the Indian economy. Given the evolving risks and uncertainties, the MPC has decided to keep the policy repo rate unchanged at 4 percent. The MPC also decided to remain accommodative while focusing on ‘withdrawal of accommodation’ to ensure that inflation remains within the target going forward while supporting growth.
In view of global aspects, with the expansion of geopolitical strife and related sanctions, the world economic situation has deteriorated since the MPC’s meeting in February 2022. Commodity prices have risen significantly across the board amid increased volatility, with negative consequences for net commodity importers. The financial markets have become more volatile. Early in March, crude oil prices soared to a 14-year high; despite some retracement, they remain unstable at high levels. Supply chain challenges, which had been expected to alleviate, have resurfaced. The broad-based rise in global energy prices has worsened inflationary pressures in both developed and Emerging Economies (EMEs), prompting a substantial revision in inflation forecasts. The global composite Purchasing Managers’ Index (PMI) fell to 52.7 in March from 53.5 in February, as output growth in both the manufacturing and service sectors slowed. The global merchandise trade momentum has slowed.
Several central banks, particularly systemic ones, are continuing to normalise and tighten their monetary policy stances. As a result, sovereign bond rates in significant Advanced Economies have been rising. Bullion prices had risen to near-2020 highs due to safe-haven flows but had recently corrected as bond yields rose. Global equity markets fell, though they have recently recovered some ground. Overall, the global economy is facing significant headwinds from a variety of sources, including ongoing uncertainty about the pandemic’s trajectory.
To bring our focus back, within the boundaries, the National Statistical Office (NSO) announced its second advance estimates (SAE) for 2021-22 on February 28, 2022, putting India’s real GDP growth at 8.9%, 1.8% higher than the pre-pandemic (2019-20) level. With the rapid ebbing of the third wave in Q4:2021-22, indicators show hints of recovery, but the picture is ambiguous.
Inflationary pressures in the CPI increased to 6.0% in January 2022 and 6.1% in February 2022, exceeding the upper acceptability threshold. Due to continued deflation in power and stable LPG prices, fuel inflation has slowed. Core inflation, which excludes food and fuel, remained high in February. Inflation will be heavily influenced by the growing geopolitical environment and its impact on global commodity pricing and logistics in the future.
Other points of discussion;
- The rate of contraction in passenger vehicle sales eased in February, but urban demand represented in domestic air traffic recovered in March.
- Rural demand, on the other hand, fell in February, as did two-wheeler and tractor purchases.
- In February, capital goods imports rose sharply, despite the persistent contraction in domestic production.
- In February-March, services sector indicators such as railway freight, e-way bills, GST collections, toll collections, fuel usage, and power demand all increased.
- In terms of food costs, domestic cereal prices have risen in lockstep with international prices, however, record foodgrain production and buffer inventory level should keep domestic prices in check.
By Aryan Manwani