Fortifying own macro fundamentals best shield against global shocks: RBI Deputy Governor Patra

The RBI bank estimates the real GDP to expand 7.2 per cent in fiscal 2025 and around 7 per cent in fiscal 2026.
Reserve Bank of India (RBI) Deputy Governor Michael D. Patra.
Reserve Bank of India (RBI) Deputy Governor Michael D. Patra.File Photo
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MUMBAI: Fortifying our macroeconomic fundamentals is the best defence against rising global uncertainties, the senior most deputy governor of the central bank has said, noting the fall in the country’s both merchandise exports and imports during episodes of rising geopolitical risks.

The Reserve Bank’s most effective shield against such risk is to strengthen the macroeconomic fundamentals and building foreign exchange reserves to counter global uncertainties, deputy governor Michael Patra said in a speech at New York Fed’s central banking seminar on Monday, which was released by the RBI Tuesday.

“We believe that the best defence against global risks is to strengthen the macroeconomic fundamentals and build adequate buffers, supported by prudent macroeconomic policies," Patra, a strong votary of stable inflation as the core focus of monetary policy, said.

The RBI has been opportunistically building its foreign exchange reserves, he said, which at around USD 700 billion now cover the external debt, all debt servicing requirements and are equivalent to or close to 12 months of imports. This year itself, the RBI has added as much as USD 35 billion to the reserves.

The RBI bank estimates the real GDP to expand 7.2 per cent in fiscal 2025 and around 7 per cent in fiscal 2026. Thereafter, there is a strong likelihood that the growth will revert to the 8 per cent trend," Patra told the New York audience.

Meanwhile, inflation rose above the RBI’s target of 4 percent in September at 5.65 per cent after slipping below it during July and August. The same is set to remain at that level in October too thereafter may begin to trend down due to base effects.

The spike in inflation was due to a pickup in price momentum in food items, which constitute as much as 45.9 per cent of the CPI basket, and the adverse base effects inherent in year-on-year measurement, the deputy governor said.

"Our projection indicates that these price pressures will persist in October and November before headline inflation realigns with the target from December and remains aligned in FY25-26," he added.

Uncertainty shocks lead to slower growth but higher inflation, he said.

Speaking on the dilemma that central banks face when it comes to the monetary policy to fight inflation or to support growth, Parta, who is a monetary economist and heads the monetary policy department at the central bank, "This presents a dilemma for monetary policy: tighten to control high inflation or ease to respond to lower growth."

The RBI has kept rates on hold for ten straight meetings and is expected to start lowering them, possibly in early 2025. Many were expecting the easing to begin from December, but the steep hike in CPI has put paid to that.

Uncertainty shocks from across the boarders for the country tend to mimic aggregate supply shocks, with heightened uncertainty leading to slower growth but higher inflation, said the deputy governor.

Applying a one standard deviation shock to the (text mining-based policy uncertainty) index in a structural vector auto regression framework on quarterly data for India produces an interesting result. In the case of advanced economies such as the US, research suggests that uncertainty shocks lead to lower output and lower prices, he said.

“In the Indian context, however, uncertainty shocks tend to mimic aggregate supply shocks such that heightened uncertainty leads to slower growth but higher inflation” Patra said.

Stating that India’s time has come, he said, “India heads into its future with the youngest population in the world with a median age of 28. Unlike in many parts of the world, the working age population is growing – every sixth working age person is an Indian.”

Patra noted that since independence in 1947, India’s growth path has undergone three structural shifts with trend growth, having risen to 7 per cent during 2002-2019. After the severe contraction in the pandemic year, a new growth trajectory averaging 8 per cent seems to be forming during 2021-24, he added.

Stating that GDP will revert to 8 per cent trend soon, he said “India is now regarded as the fastest growing major economy. Already the fifth largest economy in terms of market exchange rates, it is poised to become the third largest economy by 2030. It is already the third largest economy in terms of purchasing power parity.

“Our projections show that real GDP growth will be 7.2 per cent in FY25 and around 7 per cent in FY26 in a cyclical correction to the rebound from the pandemic. Thereafter, there is a strong likelihood that India’s growth will revert to the 8 per cent trend,” he said.

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