The Covid-19 pandemic had a major impact on the world economy in the last two years. Now, the recovery is expected to suffer a “significant loss of momentum” this year amid multiple headwinds, including the Russian invasion of Ukraine, the Reserve Bank of India said on Friday.
“The global recovery is expected to suffer a significant loss of momentum in 2022. The risks are great and to the downside: escalation of the war; shortage; resurgence of the pandemic; slowdown in China; and climate stress exceeds the goals of the Paris agreement,” the central bank said in its annual report.
The International Monetary Fund recently cut its global growth forecast to 3.6% in 2022, from 6.1% in 2021.
The Reserve Bank warned in its annual report that “policy trade-offs are becoming increasingly complex going forward” and risks, including stagflation, “are of great importance” in several countries.
Despite the headwinds, India remains in a better position, the RBI considered.
“Amid these adverse international developments, the Indian economy is relatively better positioned to strengthen the recovery that is underway and improve macroeconomic prospects going forward,” he said.
The future path of growth will be conditioned by addressing supply-side bottlenecks, calibrating monetary policy to bring inflation within target while supporting growth, and fiscal policy support for aggregate demand, especially by boosting capital spending, the central bank said.
As the pandemic swept across the globe in 2020-2021, central banks lowered interest rates globally and injected massive liquidity into the system. But, in recent months, a rise in inflation has forced them to tighten their policies and raise interest rates.
“The persistence of high inflation is forcing compensatory monetary policy action at a time when priority should have been given to supporting the economic recovery,” he said.
So far in 2022, more than 40 central banks in advanced economies and emerging markets have raised policy interest rates and/or reduced liquidity, the annual report notes.
The RBI itself pulled a surprise earlier this month, unexpectedly raising the benchmark repo rate by 40 basis points to 4.40 percent, while raising the cash reserve ratio.
Retail inflation in April rose to an 8-year high of 7.79 percent in April. With inflation well above the RBI’s target band of 2% to 6%, it is expected to raise interest rates further at the next monetary policy committee meeting in June.
In a television interview earlier this week, RBI Governor Shaktikanta Das said the expectation of a rate hike was “obvious”.
RBI said in the annual report that its monetary policy remains accommodative, but focused on withdrawing accommodation.
“Priority has been assigned to containing inflation within the target in the future, while supporting growth,” he said.
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