rbi: Widening trade deficit and large capital outflows are testing India’s strength, says RBI report
Disruptive fallout from geopolitical hostilities led to soaring commodity prices, tighter financial conditions and terms of trade
shock for India, according to the report.
Foreign portfolio investors (FPIs) became net sellers of domestic equities in March 2022 for the sixth consecutive month with large capital outflows from the financial services and software services sector.
“Rapidly widening trade and current account deficits coexisting with portfolio capital outflows are weighing on external sustainability, although the strength of underlying fundamentals and the stock of international reserves provide buffers,” the report prepared by the report said. research wing of RBI.
Soaring commodity prices are already posing inflationary risks, including through soaring imports.
The report says India is facing these challenges from a position of strength based on expanded immunization coverage, financial sector resilience, robust exports and remittances, and government efforts to boost spending. investment in infrastructure.
India’s foreign exchange reserves stood at $604 billion as of April 8, representing about 12 months of imports. RBI has already had to dip into its reserves to avoid a sharp drop in the value of the rupee against the dollar. The tightening cost of oil imports and portfolio outflows continued to pressure the rupiah, which depreciated 1.6% against the dollar in March 2022.
Reserves have been depleted by $29 billion since February 18, two days before the start of the Russian-Ukrainian war. Foreign exchange reserves were at their peak at $642.453 billion on September 3 last year.
The near-term global outlook looks bleak with tight supply chains and an accelerating pace of monetary policy normalization. “Emerging market economies are bracing for rapid shifts in risk sentiment and tightening global financial conditions that could produce real economic consequences that could thwart nascent recoveries or even precipitate soaring inflation and economic downturns,” the report said, adding that India’s economy is not immune to these negative externalities.