In Challenging Global Environment, Domestic Economy Gaining Traction: RBI

The RBI has concluded its three days policy meeting today and has declared its economic measures. The central bank has raised the key lending rate by 50 bps to control the hiking inflation. However, inflation is not only one of the biggest challenges for India at present, most economies are worried about the same challenge. The equity markets and commodity markets are being triggered due to this. Additionally, the US, Canada, UK, and India, all major countries are raising the interest rates to control inflation, and government bonds are giving better yields. Along with it, the recent east European war has also been an issue for the global uncertainties.

The war in Europe and the accompanying sanctions have kept global commodity prices elevated. This is exerting sustained upward pressure on consumer price inflation, well beyond the targets in most of the major countries. The RBI thinks, "The ongoing war is also turning out to be a dampener for global trade and growth. The faster pace of monetary policy normalization undertaken by systemic advanced economies (AEs) is leading to heightened volatility in global financial markets. This is reflected in sharp corrections in major equity markets, sizeable swings in sovereign bond yields, US dollar appreciation, and capital outflows from EMEs and even from some AEs. The EMEs are also witnessing the depreciation of their currencies. Globally, stagflation concerns are growing and are amplifying the volatility in global financial markets. This is feeding back into the real economy and further clouding the outlook."

Today, the MPC of RBI has commented, "In such a challenging global environment, domestic economic activity is gaining traction, while inflation pressures have intensified further. The upside risks to inflation as highlighted in the April and May 2022 policies have materialized earlier than anticipated - both in terms of timing and magnitude. Inflationary pressures have become broad-based and remain largely driven by adverse supply shocks." However, growing signs of a higher pass-through of input costs to selling prices are being observed. The RBI thinks that inflation in India is likely to remain above the upper tolerance band of 6% through the first 3 quarters of FY23.