Global risks persist despite US-Iran truce, but India backed by strong fundamentals: RBI
Mumbai, June 22
The Reserve Bank of India has said that the global economic landscape remains fragile despite some relief from the interim US-Iran peace agreement, while noting that India has entered the current period of uncertainty with stronger economic fundamentals compared with many other countries.
In its June Bulletin, the RBI said any breakdown of the US-Iran agreement could revive significant risks for the global economy, including higher inflation expectations, disruptions to critical energy infrastructure, delayed investment spending, food security concerns, financial stability risks and structurally lower economic growth.
It stated, "The global economic landscape remains fragile despite some respite gained through the interim US-Iran peace agreement..... The Indian economy entered this turbulence with much better fundamentals relative to many other countries to sustain the shock".
The bulletin noted that these uncertainties could affect countries through multiple channels, including international trade, commodity prices, capital flows and cost pressures.
According to the RBI, India is better positioned to absorb external shocks due to its strong macroeconomic fundamentals built over the past few years.
The central bank highlighted that India has maintained consistently high economic growth, anchored inflation expectations, sustained fiscal consolidation, a manageable current account balance and adequate foreign exchange buffers.
These factors, it said, have strengthened the country's ability to withstand external challenges compared to similar episodes in the past.
However, the RBI cautioned that an adverse southwest monsoon could affect the domestic growth and inflation outlook going forward.
The bulletin also discussed domestic liquidity conditions. It said surplus liquidity moderated during May due to a continued rise in currency in circulation, the Reserve Bank's foreign exchange operations and the build-up of government cash balances.
To manage liquidity conditions, the RBI undertook measures to inject both durable and transient liquidity into the financial system. Surplus liquidity moderated further during June, up to June 18, while the use of the Standing Deposit Facility also declined during the month.
According to the bulletin, liquidity conditions are expected to improve ahead as the drawdown of government cash balances following the RBI's surplus transfer is likely to augment liquidity in the banking system.
The RBI also highlighted developments in energy markets. It noted that disruptions in global energy supply chains kept the price of the Indian basket of crude oil elevated, although prices eased in June after reaching a peak in April.
The RBI said that while global uncertainties remain elevated, India's macroeconomic strengths provide an important cushion against external shocks, though developments related to the monsoon and global energy markets will remain key areas to watch.
— ANI
Reader Comments
This is reassuring but I wish the RBI had addressed inflation more directly. Common man is still feeling the pinch at the petrol pump and in vegetable prices. Hope the monsoon doesn't worsen things. 🙏
Finally some good news for the economy. Our forex reserves and fiscal consolidation have indeed helped. But the real test will be when global energy prices rise again. Let's hope the government maintains its reform momentum.
Interesting perspective from the RBI. While India's fundamentals are indeed stronger than many peers, the vulnerability to external shocks - from energy to food prices - remains significant. The monsoon factor is a crucial wild card this year.
Good analysis but I'm skeptical about how much the common person benefits from these "strong fundamentals". When will we see lower interest rates and more jobs? The RBI should focus on growth too, not just stability. 🤔
Comparing India's position to other emerging markets, the RBI's confidence seems well-placed. However, the US-Iran truce is fragile and any breakdown could cause volatility. India needs to continue building buffers and diversify energy sources.
The RBI's bulletin is a balanced take. It rightly highlights our strengths but also flags risks
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