Amidst global recovery shock and inflation; RBI manoeuvres growth policy

European crisis takes a toll on India growth story as ongoing war offsets gains of ebbing Omicron virus    

RBI keeps track of Inflation

Rising inflation has once again derailed the growth momentum for India and the rest of the world, thanks to the ongoing Russia-Ukraine conflict. The war has not only dragged for period far more than anticipated, there seems no end to this conflict even after almost 50 days.

The Reserve Bank of India (RBI) in its April Monetary Policy announcements lowered the real Gross Domestic Product (GDP) growth estimates for FY23 (1 April 2022 – 31 March 2023) to 7.2 per cent from 7.8 per cent it estimated two months back in the February Monetary Policy.

The above estimates are based on assumptions that the crude oil prices for Indian basket remain at USD 100 per barrel during 2022-23.

According to the second advance estimates released by the National Statistical Office (NSO) on 28 February this year, the real GDP rose by 8.9 per cent in 2021- 22 (April-March).

For Q1 of FY23, the GDP growth estimates is 16.2 per cent; for Q2 it is at 6.2 per cent; for Q3 it is at 4.1 per cent; and for Q4 it is at 4.0 per cent, the Central Bank said.

The downward revision in FY23 GDP is on the back higher inflation estimates. Real GDP is adjusted for inflation. The RBI in its April policy has revised inflation upwards from 5.7 per cent for FY23 from an earlier estimate 4.5 per cent.

While the average inflation remains within the comfort zone of RBI (4+/-2), Q1 estimates are slightly off the mark with retail inflation expected at 6.3 per cent; Q2 at 5.8 per cent; Q3 at 5.4 per cent; and Q4 at 5.1 per cent.

The RBI noted that Russia-Ukraine crisis has offset the advantage India gained from a largely blunt Omicron situation. “Inflation is now projected to be higher and growth lower than the assessment in February,” Governor Shaktikanta Das said in his MPC speech.

After Effects

Global inflation was creating worries even before the conflict came into picture but the most noticeable impact of the war was crude oil hitting levels not seen in over a decade. The price of Brent Crude briefly hit USD 140 mark.

Price of metals, food including wheat, corn, edible oil and fertilisers have been hit and the situation is expected to prevail amid supply disruptions.

The developments have intensified the projections of global inflation and will have significant impact on the output in all major geographies, the RBI noted. 

Not just the trade and output will get impacted from the rising inflation scenario, the demand will also take a hit, much worse than was anticipated two months ago, the central bank said.

India’s import bills coupled with the outflow of money from Indian markets has also led to considerable weakness in the Indian Rupee. The INR hit unprecedented highs of 77 against the greenback.  

India has not been the only major emerging economies, where the outflow has been prevalent. In general, there has been risk aversion towards assets of emerging market economies (EMEs).

Though India has managed to exhibit growth, the economic activity is barely above its pre-pandemic level.

To RBI’s Credit

To RBI’s credit, it has stuck to a predictable policy regime and not indulged in policy shocks. It has also not followed other countries with rate hikes. The 6-member MPC committee under Governor Shaktikanta Das has kept the repo rate at 4 per cent while the reverse repo rate and 3.35 per cent. The stance remains accommodative while RBI keeps its focusing on withdrawal of excess liquidity to ensure that inflation remains within its target going forward, while supporting growth.


The Indian economy is steadily reviving from its pandemic induced contraction, yet major challenges remain. The elevated prices of key commodities including petrol, diesel, cooking gas, food items and edible oil would impact India’s consumption, which has seen some tailwind off late.

The RBI noted that two key drivers of domestic demand – private consumption and private investment remain a pain point with the former being only 1.2 per cent up from the pre-pandemic levels while the latter at 2.6 per cent.

The impact of Omiron has been less brutal which has kept restrictions limited. Since the beginning of April, most of them have been done away with. The contact intensive services like those related to hospitality and tourism have now resumed, though a big catching up is still to be done. They trail the 2019-20 level, the RBI Governor said in his speech.

The pandemic remains an untamed challenge. Economic activity slowed down in Q3 of FY22 and got exacerbated by the emergence of the Omicron variant in January 2022.

Several high frequency indicators – railway freight; GST collections; toll collections; electricity demand; fuel consumption; and imports of capital goods posted robust year-on-year expansion during February-March but a fourth cannot be completely ruled out.

Any restrictions have a direct impact on the above indicators.


High frequency indicators have shown sustainable green shoots, which augurs well for the economy. Domestic air traffic is also finding its week with March turning out to be exemplary for the airline companies.  

An RBI survey also finds consumer confidence improving and households’ optimism in outlook for the year ahead has strengthened with an uptick in sentiments. Business confidence is in optimistic territory and supportive of revival in economic activity.

The RBI also expects a strong rural recovery aided by robust Rabi output. At the same time a pick-up in contact-intensive services should help in further strengthening urban demand, it said. The business confidence in India is improving and that could get reflected in investment activity picking up with improving business confidence, pick up in bank credit, continuing support from government capital expenditure as we move ahead in this financial year.

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