The Indian economy is not immune to global headwinds even if it has shown resilience so far, according to the Reserve Bank of India’s (RBI’s) monthly report, “State of the Economy”, released on Monday. The report observed that net foreign direct investment (FDI) had turned negative in August due to moderation in inflows and increase in repatriation.
“While the Indian economy is not immune to global headwinds, it has so far exhibited resilience, driven by a focus on strong and durable macroeconomic fundamentals,” the report said while emphasising the need for economic resilience, which had become a key priority. It said economic fundamentals were strong because of low inflation, the robust balance sheets of banks and companies, adequate foreign-exchange reserves, and a credible monetary and fiscal framework.
The report has been authored by RBI staffers with the guidance of Deputy Governor Poonam Gupta. The views in the report are those of the authors and not of RBI, it was clarified. “In the context of rising protectionism in the US, and rising fiscal risks in AEs (advanced economies), IMF’s October World Economic Outlook talks about ‘a new global economic landscape slowly takes shape’.”
“The state of flux of the global economy and policies present considerable uncertainties to the macroeconomic outlook,” the RBI report said.
The report observed that the high-frequency indicators pointed to resilient domestic economic activities, with signs of revival in urban demand and robust rural demand. The agricultural sector sustained its growth momentum, supported by above-normal rain and higher kharif sowing.
“Although manufacturing momentum moderated slightly, business confidence in manufacturing and services reached a six-month peak, reflecting higher optimism,” it said.
While noting that the retail-inflation rate, which is the headline rate, in September fell to its lowest level since June 2017 and remained below the target for the eighth consecutive month, driven by deflation in food, the core inflation rate (consumer price inflation excluding food and fuel inflation) edged up, reflecting the combined effect of increase in gold prices as well as a significant pickup in housing inflation.
Quoting the Monetary Policy Committee resolution of October, the report said the growth outlook remained resilient, supported by domestic drivers, despite uncertainties on the external front. Domestic structural reforms are helping to somewhat offset the drag on growth from the weakening external demand conditions.
“The current macroeconomic conditions and the outlook, as noted by the MPC, has opened up policy space for further supporting growth,” it said.
Outward FDI too declined in August. These investments were mainly in the financial, insurance and business services, and manufacturing sectors, with Singapore, the United Arab Emirates, and the United States being the major destinations.
