In its report on the state of the economy, RBI said that with every passing day, the balance of risks gets increasingly tilted towards a darkening global outlook for 2023.
“Emerging market economies (EMEs) appear even more vulnerable, having battled currency depreciations and capital outflows in addition to slowing growth and high inflation. Debt distress is rising, with a surge in default rates and an appreciating US dollar – the principal currency in which debt is denominated – although more recently it has tumbled down from 20-year highs. Looking beyond, a mild recovery is projected to get underway in most countries in 2024,” the report saidm
It predicted that emerging markets in Asia are likely to become the world’s engine of growth, collectively accounting for close to three-quarters of global growth in 2023 and around three-fifths in 2024.
The growth outlook for 2023 is overcast with indications of weaker global growth, fraught with downside risks. “Inflation is likely to moderate in 2023 from current levels, but it would remain well above targets in most economies. In its latest Economic Outlook released on November 22, 2022 the Organisation for Economic Co-operation and Development (OECD) has pegged global growth for 2023 at 90 basis points below the forecast for 2022,” RBI said.
In India, the RBI said that though inflation has eased “it is certainly not out.”
“If anything, it has broadened and become stubborn, especially at its core. An unease hangs over energy prices: for now, OPEC plus stayed its hand in cutting production, but an oil price cap threatens to unleash disruptive financial forces, with hedge funds already cutting net long positions in crude contracts. Despite moderation in global commodity markets, climate change and the war in Ukraine are set to keep food prices at higher than pre-pandemic levels,” the report said.
In a separate paper titled ‘Anatomy of Inflation’s Ascent in India’ RBI deputy governor Michael Debabrata Patra said consumer prices in India rose above the upper tolerance band of the central bank’s target because of a series of supply shocks, induced first by COVID-19 and then followed up by the war in Ukraine and weather-related uncertainties.
“The war in Ukraine and the weather-related disturbances accentuated supply side shocks in Q1 of 2022-23, pushing inflation up to 7.3%. Fuel price (including petrol and diesel) shocks contributed 39% to the deviation of headline inflation from the target. The shocks emanating from weatherrelated events and the Ukraine war led to food price shocks, which contributed 33%. Exchange rate pass-through continued to contribute 16%,” Patra said.
Patra said supply side shocks played a predominant in pushing up inflation above the tolerance band. “What started as a shock to food and fuel prices got increasingly generalised over ensuing months. This was reflected in highly elevated and sticky core infl ation. Unprecedented input cost pressures got translated to output prices, particularly goods prices, in spite of muted demand conditions and pricing power,” he said.
The RBI report said that incoming data suggests that global inflation has peaked.
However, geopolitical risks as well as tight supply demand balance in key commodities impart considerable uncertainty to the outlook.