“In a global landscape marked by fears of recession and war, the Indian economy is showing resilience. The recent resurgence of the monsoon, the recovery of manufacturing and services, the stabilization of inflationary pressures and strong buffers in the form of adequate international reserves, sufficient stocks of food grains and a well-capitalized financial system are cheering prospects and strengthen the conditions for a high and sustainable growth trajectory in the medium term,” says RBI.
“The role of monetary policy in responding to supply-driven inflation has attracted much attention following the current global inflationary episode. This paper using quarterly projection model simulations at a shock of negative supply characterized by an increase in the price of crude oil shows that the monetary policy response is conditioned by a) the nature of the shock; b) aggregate demand conditions; c) credibility of monetary policy; and d) the reaction of other agents of the economy to the shock,” added RBI.
The worst of the recent inflation spike will be behind, according to RBI, provided the slowdown in global commodity prices seen in recent weeks persists, coupled with the easing of supply chain constraints. Consumer Price Index (CPI) data showed inflation was 7.01% in June, down from 7.04% in May and 7.79% in April. Sharp drop in commodity prices around the world. There are multiple signs that India’s economy continues to grow resolutely in the first quarter of FY23, reports RBI, despite the burden of global shocks, high inflation and other geopolitical factors.
With a flow of ₹49,469 crore in June – the highest monthly outflow since March 2020 – foreign portfolio investors (REITs) were net sellers in the Indian stock market for the ninth consecutive month. The sale persisted in July until July 8, 2022, totaling ₹3,716 crore and overall REITs pulled ₹1.2 lakh crore in the Indian stock market in 2022-2023. The Rupee fell to an all-time low, but REIT dumping, trade deficits and the rising Dollar Index all played a role in the decline. According to a study by Bank of America Securities, cited by PTI, India’s current account deficit is expected to reach $105 billion (approximately ₹8.37 lakh crore), or 3% of its gross domestic product, this financial year. In 2021/22, the CAD represented 1.2% of GDP, according to information provided in June. A weakening of the rupee could increase the current account deficit, since India imports about 80% of its oil needs. The RBI has also suggested the Rupee settlement mechanism for international trade.
RBI said that “the role of supply-side factors in shaping the path of food inflation and inflation in general has been well recognized. Timely and reliable indicators of agricultural production are essential to assess inflationary trends in the near future. In this context, the study explores the usefulness of satellite imagery-based vegetation indicators for assessing product arrivals in agricultural mandis, well in advance.”
“The electronicization of global currency (FX) trading with the emergence of multi-bank platforms has transformed trade execution and price discovery. Some of these changes can be seen even in the onshore Indian Rupee (INR) market. ), albeit in a limited way. This article documents the recent changes in India’s forex markets in terms of electronicization and its wider implications,” the RBI article states. The recent introduction of new types of trading channels , such as Single Banking Platforms (SBPs) and Market Makers, such as major trading firms, has been characterized as the electronicization of global currency trading (PTFs). With the increase in trading volumes on these platforms, SBPs have also been more visible in the Indian forex market in recent years, according to RBI.
According to a forecast by BofA, the country’s CAD is expected to reach $105 billion or 3% of GDP this fiscal year, mainly due to the ever-increasing trade imbalance. “While we continue to see Brent at $105 a barrel in 2022, higher non-oil and non-gold imports and lower exports are now expected to push the CAD up 3% to $105 billion from 2.6 % of GDP or $90 billion projected earlier,” Bank of America (BofA) Securities said in a report.
The Indian rupee is comparatively better positioned than other foreign currencies against the dollar, according to Finance Minister Nirmala Sitharaman’s statement last week. Considering that India imports more than 80% of its crude oil, inflation would be the most affected by the fall of the rupee. Since Russia’s invasion of Ukraine, crude oil prices have consistently exceeded $100 a barrel. The rupee has been falling since the start of the year and Brent reached $113 a barrel in July. “When a supply shock is transient, inflation returns to equilibrium without any monetary policy action needed and can see through its initial impact because it is outside its domain and its powers. However, repeated supply shocks generate second-round effects requiring preventive monetary policy action. When the economy is going through a contraction phase, an adverse supply shock can aggravate the monetary policy trade-off, as it cannot afford to further weaken demand conditions by responding to the inflationary impact of the supply shock. ‘offer,’ RBI said.
“In the event of an adverse supply shock, by frontloading monetary policy actions, credibility is demonstrated by showing a commitment to the inflation target. This will anchor inflation expectations, requiring less aggressive policy increases in the future and, therefore, less sacrifice of growth,” RBI said in its monthly Bulletin report for June.
Although the Indian economy has so far shown itself to be stable, if the weakness of the rupee against the dollar continues, the rise in commodity prices will continue, which will have an impact on the entire GDP (Commodity Raw Interior). Moreover, since the market rate of gold and its relationship with the US dollar are inversely proportional, the demand and supply of gold would be affected, causing the national economy to fall in the face of a strong dollar.
(With PTI entries)
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