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RBI flags global degrowth hit on trade, EMs

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Even as the Monetary Policy Committee maintained that the domestic economic activity is resilient and progressing broadly along its expected lines, with India expected to be among the fastest growing economies during 2022-23, the Reserve Bank of India (RBI) raised its concerns over impact of downward projections of global growth and rising risk of recession on global trade and emerging economies such as India.

“Disquietingly, globalisation of inflation is coinciding with deglobalisation of trade,” said RBI Governor Shaktikanta Das adding that the pandemic and war have ignited tendencies towards greater fragmentation, reshoring of supply chains and retrenchment of capital flows, which will pose long-term challenges for both globalisation and the global economy.

He said these developments pose a greater risk for emerging market economies (EMEs) as they will have to contend with both “domestic growth-inflation trade-offs and spillovers from the most synchronised tightening of monetary policy worldwide.”

While EMEs are facing tightening of external financial conditions, capital outflows, currency depreciations and reserve losses simultaneously, India too has witnessed portfolio outflows amounting to $13.3 billion during the current financial year and has seen its currency depreciate over 4 per cent this financial year.

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External conditions tightening

While emerging market economies (EMEs) are facing tightening of external financial conditions, capital outflows, currency depreciations and reserve losses simultaneously, India too has witnessed portfolio outflows amounting to $13.3 billion during the current financial year and has seen its currency depreciate over 4% this fiscal.

In its statement, the RBI said India’s external sector has weathered the storm while navigating through recent global spillovers and its merchandise exports have risen in April-July 2022. It, however, said as “merchandise imports surged to record high on elevated global commodity prices, consequently, the merchandise trade deficit expanded to $100 billion in April-July 2022.” It said that the provisional data shows that demand for services exports, especially IT services, remained buoyant in Q1 despite global uncertainty.

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As there have been concenrs over the current account deficit, Das said that it is expected to remain within manageable limit and RBI has the ability to finance it.

“The forex reserves remain strong and RBI will deal with excess volatility of exchange rates,” Das said adding that they expect relief on import front as oil and commodity prices are softening.

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