Indian economy faces headwinds from Omicron, inflation: RBI Governor


MUMBAI: It has been reported that The Reserve Bank of India (RBI) governor Shaktikanta Das has said that the Indian economy faces headwinds from global developments and Omicron. Also, inflation continued to remain a concern buffeted by the build-up of cost pressures.

The RBI governor’s observations are part of the financial stability report (FSR), released by the central bank on Wednesday. In the report, the RBI said that even ahead of Omicron, global growth and trade had begun to lose pace, stalled by formidable headwinds from supply disruptions and bottlenecks, logistics dysfunctions, shipping charges and port congestions as well as a shortage in key intermediates and personnel.

“These forces, along with elevated commodity prices, have rendered inflationary pressures persistent across geographies, posing a serious risk to global economic prospects”, the report said.

The RBI also said that the government’s fiscal deficit target of 6.8% for the current financial year is likely to come under strain following the second supplementary demand of grants (Rs 3.7 lakh crore) presented in December 2021. On the positive side, there is an element of fiscal consolidation as the demand for grants includes the retirement of high-cost payment obligations relating to Air India. Despite the fiscal deficit challenge, the RBI said that it expects government borrowing to remain within projections.

The report said that the IMF has indicated the likelihood of further downgrades in its projections due to the emergence of the Omicron variant, which triggered the worst ‘Black Friday’ plunge by the Dow Jones. Omicron has also led to a drop in inflows from foreign portfolio investors. “After recording net inflows of $7.6 billion during H1:2021-22, net outflows have occurred during Q3:2021-22 so far,” the report said.

While the economy has expanded beyond the pre-pandemic level, the virus is adding to inequality. “The pace of the recovery remains uneven across sectors, inflation formation is being subjected to repetitive supply shocks and the outlook is overcast with global risks. Omicron haunts near-term prospects,” the report said.

On the positive side, Das observed that strong supply-side measures to contain food and energy prices are helping moderate price risks. “While the pandemic induced bouts of volatility, spillovers and heightened uncertainty are challenging, the Indian financial system has stood up well and remains well prepared to meet the funding requirements of the economy,” the report said. (Times of India)