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RBI Annual Report: Global recovery to suffer significant loss of momentum, but India better placed

Policy trade-offs becoming increasingly complex going forward, says central bank

Indian economy is relatively better placed to strengthen the recovery that is underway and improve macroeconomic prospects going forward | Reuters Indian economy is relatively better placed to strengthen the recovery that is underway and improve macroeconomic prospects going forward | Reuters

The Covid-19 pandemic had a huge impact on the global economy in the past two years. Now, the recovery is expected to suffer a “significant loss of momentum” this year amid multiple headwinds including the Russian invasion of Ukraine, the Reserve Bank of India said on Friday.

“The global recovery is expected to suffer a significant loss of momentum in 2022. Risks are large and to the downside - war escalation; shortages; resurgence of the pandemic; slowdown in China; and climate stress overshooting the Paris agreement goals,” the central bank said in its annual report.

The International Monetary Fund recently slashed its global growth forecast to 3.6 per cent in 2022, from 6.1 per cent in 2021. 

The Reserve Bank warned in its annual report that “policy trade-offs are becoming increasingly complex going forward” and risks, including stagflation, “loom large” in several countries.

Despite the headwinds, India remains better placed, the RBI felt.

“Amidst these adverse international developments, the Indian economy is relatively better placed to strengthen the recovery that is underway and improve macroeconomic prospects going forward,” it said.

The future path of growth will be conditioned by addressing supply-side bottlenecks, calibrating monetary policy to bring inflation within the target while supporting growth and targeted fiscal policy support to aggregate demand, especially by boosting capital spending, the central bank said.

As the pandemic ravaged worldwide in 2020-2021, central banks globally slashed interest rates and pumped huge liquidity into the system. But, in the last few months, a surge in inflation has forced them to tighten their policies and raise interest rates.

“The persistence of high inflation is forcing countervailing monetary policy action at a time when supporting the economic recovery should have been assigned priority,” it said.

So far in 2022, more than 40 central banks across advanced and emerging market economies have raised policy interest rates and/ or scaled back liquidity, the annual report noted.  

The RBI itself sprang a surprise earlier this month, by unexpectedly raising the benchmark Repo Rate by 40 basis points to 4.40 per cent, while also increasing the cash reserve ratio.

Retail inflation in April surged to an 8-year high of 7.79 per cent in April. With inflation well above RBI’s targeted band of 2 per cent to 6 per cent, it is widely expected to raise interest rates further in the upcoming monetary policy committee meeting in June. 

In a TV interview earlier this week, RBI Governor Shaktikanta Das said that expectation of rate hike was a “no-brainer.”

RBI said in the annual report that its monetary policy remains accommodative, but focused on withdrawal of accommodation. 

“Priority has been assigned to containing inflation within the target going forward, while supporting growth,” it said. 

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