The Financial Stability Report (FSR), however, said the financial system remains resilient and supports economic revival.
Highlight
- The on-going war in Europe has clouded the global economic outlook
- Although the domestic economy is facing spillover from global conditions, it remains on a recovery
- FSRs from December 2021 onwards, global economic prospects have deteriorated markedly, RBI said
In its Financial Stability Report released on Thursday, the RBI said persistently high inflation globally is here to stay longer than expected as ongoing wars and sanctions impact economies, threatening a further slowdown in global trade volumes.
The global economic outlook has been tightened by central banks in response to the ongoing war in Europe and rising inflationary pressures, a Reserve Bank of India (RBI) report said. Although the domestic economy continues to be affected by global conditions, it remains on a recovery path.
According to the FSR, “The financial system remains resilient and supports economic revival. Banks as well as non-banking institutions have adequate capital buffers to withstand sudden shocks. High inflationary pressures, external spillovers and landfalls.” Political risks warrant careful management and close monitoring.” (Financial Stability Report).
The RBI said the shock waves from the war in Ukraine and the retaliatory economic and financial sanctions (on Russia) have jolted the global economy, which was already battling successive waves of the COVID-19 pandemic.
“The Indian economy appears to have faced the third wave of the pandemic linked to the Omicron version, although the war in Ukraine is now casting a long shadow over the outlook,” the report said.
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Since its last edition of the FSR in December 2021, the RBI said, global economic prospects have deteriorated as a result of the economic and financial effects of war and the sanctions taking their toll.
RBI said the International Monetary Fund (IMF) has projected the global growth rate to reduce from 3.6 per cent in 2022 to 6.1 per cent in 2021, as the war blows coupled with monetary crunch, financial market volatility, pandemic and uneven vaccine access Had to talk. Both AEs (advanced economies) and emerging market and developing economies (EMDEs) are expected to lose momentum by 1.9 percentage points and 3 percentage points, respectively.
Global trade volume is now expected to decline from 10.1 per cent in 2021 to 5 per cent in 2022, mainly due to a moderation in merchandise trade, as services trade is likely to remain subdued.
Inflation will be pushed into the range of 2.6 percentage points for AEs and 2.8 percentage points for EMEs.
As per the report, “surrounding inflation is now expected to persist longer than before. In most EMDEs, rising food prices and shortage of essential commodities have exposed vulnerable sections of the society to food insecurity and erosion of livelihoods. has done.”
Apart from the humanitarian crisis, the RBI report said, several adverse conditions are affecting the global economy and the international financial system.
“Going forward, the risks are large and the downside – a potential escalation of war; social unrest due to shortages; a resurgence of the pandemic; a slowdown in growth in one of the major economies and climate conditions overseeing the goals of the Paris Agreement.”
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It added that global financial conditions are likely to strengthen significantly with monetary policy normalizing and rate hikes and quantitative tightening likely in response to rising inflationary pressures.
In India, the report said, the immediate consequence of the war has been over domestic inflation with spillovers in financial markets.
However, the Indian economy has so far remained resilient on the strength of its own macro-fundamentals. Real GDP growth slowed from 5.4 per cent in October-December 2021 to 4.1 per cent in January-March 2022, leading to an annual growth rate of 8.9 per cent in 2021-22 to 8.7 per cent in the NSO’s second advance estimates.
The FSR said the recent high-frequency indicators of economic activity suggest that broad-based momentum has picked up in the first quarter of 2022-23.
It said the sharp rise in crude oil prices has adversely affected domestic inflation. The increase in the prices of petroleum products will have an impact on the prices of various goods and services in the second round.
Reserve Bank estimates suggest a 10 per cent increase in crude oil prices to US$100 a barrel could increase domestic inflation by 30 basis points (bps) and reduce GDP growth by 20 bps, respectively. can.
Since the February 2022 (RBI) policy, the Reserve Bank had revised GDP growth to 60 bps and inflation to 220 bps, mainly due to an increase in the Indian basket of crude oil prices. As of June 16, 2022, it has risen from USD 73.3 per barrel in December 2021 to USD 117.2 per barrel.
The June 2022 issue of the RBI’s Financial Stability Report said, “The global economy continues to face downside risks to growth prospects, despite persisting inflationary pressures. There are challenges to managing a soft landing while maintaining stability.”
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