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Indian Economy Showing Resilience Against Difficult Global Backdrop: RBI

The Indian economy is showing resilience, with inflation peaking and a strong pick-up in monsoons adding to the revival of growth, the Reserve Bank of India said in its monthly bulletin released on Saturday. The central bank also, in a rare comment, said the Indian rupee looks “fairly valued” even though the hostile global environment bears watching.

The comments come at a time when Reserve Bank of India governor Shaktikanta Das and deputy governor Michael Patra are attending the G20 Finance Ministers’ meet, prior to which the central bankers are reported to have met foreign investors in Singapore.

“In a global landscape marred by fears of recession and war, the Indian economy shows resilience,” the RBI said in its bulletin.

“The recent revival of the monsoon, the pick-up in manufacturing and services, stabilisation of inflation pressures and strong buffers in the form of adequate international reserves, sufficient foodgrain stocks and a well-capitalised financial system together brighten the outlook and strengthen the conditions for a sustainable high growth trajectory in the medium-term,” the RBI said.

The central bank is taking comfort from the fact that inflation has dropped, albeit marginally, for two consecutive months. Sequential momentum of inflation has also eased, led by food prices the RBI said. In June, inflation fell to 7.01% from 7.04% in May.

In addition, the recent downtick in commodity prices and cuts in state duties on petroleum products could further bring down price pressures.

“India’s inflation is on the backfoot,” the central bank said. “Very grudgingly, as we foretold, but diverging from the global central tendency.”

The RBI pointed to three factors that could further bring down inflation:

  • Central banks across the world are engaged in the most aggressive monetary policy tightening in decades so much so that financial markets wilt in the fear of imminent recession.

  • Commodity prices are easing across the board, with even announcements of a big stimulus failing to halt their meltdown.

  • Supply chain pressures are edging down globally and in India.

Should inflation continue to ease, India’s monetary policy committee may feel comfortable pausing on rate hikes earlier than the market anticipates. The MPC has raised the policy repo rate by 90 basis points to 4.9%. While markets had prices in a hike in the repo rates all the way to 6.5%, these calls have now been pulled back.

With the dollar strengthening globally amid monetary policy tightening, most other developed and emerging market currencies have weakened. The rupee, which has fallen close to 80 against the U.S. dollar has seen a “modest” depreciation of 5.1% for the financial year and 7% for the calendar year, the RBI said.

“Apparently, markets are differentiating between currencies on the basis of the size and speed of monetary policy tightening relative to the U.S. Fed,” the bulletin said.

While global developments bear watching, the Indian rupee appears “fairly valued”, the central bank indicated.

“The international environment is hostile and hence, close and continuous monitoring of the widening trade deficit and portfolio outflows is warranted, notwithstanding strong reserve buffers, moderating external debt and a fairly valued exchange rate that has wilted less in the face the monotonic strengthening of the US dollar than many peers,” the RBI wrote in the bulletin.

Alongside the stronger dollar, the rupee has been hit by net outflows of nearly Rs 1.14 lakh crore so far this year. To encourage dollar flows, the RBI, among other steps, has permitted banks to raise deposit rates on foreign currency deposits. This could help draw in funds as large banks have started to raise rates.

In addition, exporters could also bring in funds being held overseas and help ease the pressure on the currency.

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