Recovery on track, but Omicron a threat: RBI

The emergence of the Omicron strain has heightened the uncertainty in the global macroeconomic environment, accelerating risks to global trade with resumption of travel restrictions and quarantine rules at major ports and airports, said a Reserve Bank of India research paper.

“The ongoing supply-side constraints are likely to keep input prices and freight rates at elevated levels and could act as a drag on overall exports. While the low domestic infection counts and healthy pace of vaccinations augurs well for the economy, the looming threat of Omicron calls for observing greater caution and readiness to respond swiftly,” the researchers said.

While the report highlighted that inflation prints for most economies are at multi year highs compressing the headroom for policy manoeuvre, it mentioned that inflation in India is broadly aligning with the target.

India’s retail inflation, measured by the consumer price index (CPI), rose to 4.9% in November, but remained within the upper tolerance band of 6%. The wholesale price index however rose to 14.23% in the same month, making it the eighth consecutive month of double digit rise. The inflation-targeting central bank takes CPI as the proxy for price rises.

Even as the global economy remains hostage to heightened uncertainty with Omicron leading to fresh containment measures, the Indian economy is likely to grow at 9.5% for FY22, as per RBI’s projection.

A host of incoming high frequency indicators are looking upbeat and consumer confidence is gradually returning with aggregate demand conditions pointing to sustained recovery, the report said. “On the supply front, the farm sector situation remains strong with impressive progress of Rabi sowing, while the manufacturing and services record strong improvement on strengthening demand conditions and surge in new business,” it added.

India’s GDP grew 8.4% in the second quarter compared with 7.4% contraction a year ago, spearheaded by a rise in private investment and higher bank credit offtake.

The external demand for the country’s merchandise trade also remained robust, with exports clocking a growth of 16.6 per cent in November 2021 over pre-pandemic levels.