Escalation of geopolitical tensions biggest risk to India’s growth outlook: Jayanth Varma

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Image Source : PTI The Reserve Bank in its latest MPC meeting in August had decided to increase the benchmark lending rate by 50 basis points to 5.40 per cent to quell inflation.

The biggest risk to India’s growth outlook is an escalation of geopolitical tensions, especially if these tensions spread to the Asian region, RBI Monetary Policy Committee (MPC) member Jayanth R Varma said on Wednesday.

Varma, in an interview to PTI, said that inflation and inflationary expectations appear to be moderating and high inflation will certainly not become the ‘norm’ in the country. He is cautiously optimistic about the Indian economy for several reasons.

“The MPC is determined to bring inflation down close to the target rate of 4 percent as quickly as possible without imposing intolerable costs in terms of economic growth,” he said. “I would like to emphasize that high inflation will certainly not become the norm in India.”

The Reserve Bank in its latest MPC meeting in August had decided to increase the benchmark lending rate by 50 basis points to 5.40 per cent to quell inflation. The central bank has been tasked by the government to ensure that retail inflation remains within the range of 2-6 percent.

“Finally, inflation and inflationary expectations appear to be moderating (both in India and globally) and this would reduce one of the major headwinds for the Indian economy,” Varma noted.

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Retail inflation based on Consumer Price Index (CPI) eased to 6.71 percent in July but remained above RBI’s tolerance level for the seventh month in a row. The Reserve Bank had projected retail inflation to average 6.7 percent in 2022-23.

Turning to the negative side, he observed that in the current global environment, exports might not be as buoyant as they were in the past and said while India is not an export driven economy, an export slowdown would be a drag on growth if it is sustained.

“The biggest risk to the growth outlook is that of an escalation of geopolitical tensions especially if these tensions spread to the Asian region,” he said.

Russia started its military offensive against Ukraine on February 24. Western nations, including the US, have imposed major economic and other sanctions on Russia following the aggression.

Noting that inflation has already peaked, Varma said Inflation would be above the target for several quarters, but there is reason to believe that the worst is over, unless the world is confronted by another unforeseen global shock.

On the other hand, he said any adverse shocks to economic growth (domestic or global) could cause a steeper decline in inflation than is currently expected.

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