RBI to relook at GDP estimates for FY22 on Ukraine concerns

gdp-estimates

Indian Market
by 5paisa Research Team Last Updated: 2022-08-08T19:03:09+05:30

To be fair, there has been no official announcement from the RBI on this front. However, if one were to cull some broad ideas from the speech made by RBI Deputy Governor, Dr. Michael Patra, that is the message. The deputy governor hinted that due to the uncertainties caused by the Russia-Ukraine war, the RBI may have to review its projections for growth and also for inflation. Clearly, the Ukraine factor has come as a big even risk.

The ripple effects of the Ukraine war is being felt by India in a number of ways. Firstly, oil prices shot up to nearly $130/bbl, although it has tapered since.

Check - Brent Crude scales to above $130/bbl

Secondly, supply chain constraints have resulted in a sharp rise in the prices of metals, minerals and food products. Lastly, the Black Sea Embargo has resulted in India’s trade with Russia and Ukraine getting impacted. It is annually worth $10 billion. There is also the diplomatic tightrope.

Let us begin with where the projections for growth and inflation stand as of now. RBI has projected FY22 GDP growth to come in at 7.8% in contrast to the 8.9% it had originally projected. However, RBI fears that this could come down further.

The bigger concern is on inflation, which the RBI had projected to taper to 4.5% in FY23. That could spill on the higher side if the oil price inflation was not adequately contained.

Speaking at the Indian Merchants Chamber, Dr. Patra underlined that international crude prices presented an overwhelming risk to consumer inflation in India.

Crude oil is not just about the direct effect but also the downstream effect as oil effect seeps into transport, logistics and freight costs. However, Patra also made an interesting statement that inflation was still a supply shock; which meant that monetary policy may stay accommodative.

One advantage, according to Patra, was that India had the levers to manage this oil driven inflation as the government could let go on some of its oil excise revenues.

This would spare a spike in pump prices and will not destroy oil demand as is generally anticipated. Patra underlined that India did not have trade dependence to Russia to the extent of Europe or China. However, it was the spill over effects that they were really concerned about.

In short, the message is that RBI would most likely downsize GDP growth and raise inflation projections to reflect the post-Ukraine reality.

Also Read:-

India Q3 GDP growth comes in lower at 5.4%

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