RBI Governor Malhotra: Indian Economy Resilient to West Asia Conflict Shocks

The conflict in West Asia has intensified pressures on the global supply chains in March with some easing observed in the first half of April.

Before the outbreak of the conflict, India's macroeconomic fundamentals exuded confidence with buoyant growth and low inflation.

"Conditions turned adverse in March with the widening of the conflict zone and its intensification. The fundamentals of the Indian economy are on a stronger footing at the current juncture than in previous crisis episodes as well as relative to many other economies, providing it with greater resilience to withstand shocks," Malhotra said in the first RBI Bulletin of FY27.

Global growth faces increasing downside risks as the sharp rise in energy prices and shortages of inputs for various industries have stoked inflation fears and pushed up the geopolitical risk premium in oil markets.

"Heightened uncertainty precipitated by the ongoing conflict is weighing on the outlook. Safe-haven flows have exerted depreciation pressure on currencies of major economies as the US dollar has strengthened. While commodity prices, such as of metal and gold, have moderated, financial markets have become more volatile," the RBI Governor wrote.

Equities registered a broad-based correction. Sovereign bond yields, already elevated due to long-run fiscal sustainability concerns, driven by inflation fears, have hardened across major economies, he stated.

Meanwhile, domestic economic activity displayed resilience in many segments with slowdown in a few others.

"CPI inflation, driven by fuel and food, marginally edged up in March. The money market and bond yields moderated after the temporary ceasefire in West Asia. A slowdown in imports and expansion in exports narrowed trade deficit to a nine-month low. Foreign portfolio investment (FPI) flows remained volatile, although net foreign direct investment (FDI) turned positive in February," he mentioned.

Overall, the initial supply shock can potentially transform into a demand shock over the medium term if the restoration of supply chains is delayed, said Malhotra.

- IANS