Economic revival in India may be at risk from global spillovers as geo-political hostilities put pressure on inflation, trade shocks and portfolio outflows, the Reserve Bank of India (RBI) observed in its April bulletin on Monday.

India’s wholesale price inflation touched 14.55% in March and retail inflation rose to 6.95%, higher than the RBI’s tolerance band of 6%. Earlier this month, the RBI revised upwards its retail inflation forecast to 5.7% for FY23 while cutting its India GDP growth forecast to 7.2% from the earlier guidance of 7.8%.

“India crested the third wave of the pandemic with economic activity returning to speed in several sectors. These gains are, however, at risk from disruptive spillovers from geo-political hostilities as increasingly evident in inflation prints, tightening financial conditions and a terms of trade shock accompanied by portfolio outflows,” the bulletin said.

The global economy is in the throes of a geopolitical cataclysm, with heightened uncertainty obscuring the outlook. Choked supplies and mounting commodity prices, especially of food and energy, have stoked inflationary pressures, exacerbating policy trade-offs for central banks. Emerging economies are experiencing disruptive spillovers in terms of tightening financial market conditions, besides capital outflows and currency depreciations. “India too is experiencing tremors from these developments,” the RBI said in its latest bulletin.

India, however, faces these challenges with improving fundamentals and strong buffers. Going forward, spurring private investment remains a key thrust area for sustaining growth on a durable basis.

Most sectors of the economy are reaching or have exceeded pre-pandemic levels. Notably, bank credit has gathered pace and the job market is gathering steam. There is an acceleration in the travel and hospitality sectors. The construction and real estate sectors have also registered a pick-up.

Geo-political hostilities and their spillovers are, however, weighing heavily on global economic activity. International commodity prices, which were already on an upward spiral amid demand-supply imbalances, hardened precipitously in early March 2022 and remained volatile at elevated levels thereafter.

“Reflecting the pass-through of high commodity prices, headline inflation in many advanced economies spiked further to new record levels forcing central banks to hasten unwinding of accommodative monetary policy stances despite rising risks to growth,” the RBI bulletin said, referring to its own dilemma of having to soften inflation at a time when growth is at risk.

Besides the big global events and domestic price pressures, the other big concern for the RBI is the raging heat wave. Temperatures are breaking all-time records in many pockets of the country. The country as a whole saw the hottest March (average maximum temperature) in the last 122 years which could disrupt agriculture production, thereby further putting price pressures on food items.

 The RBI also left a word of caution on the India's foreign exchange reserves, which is at a record high. The rapidly widening trade deficit and capital outflows could test the sustainability of external strength, though India would be tackling it from a position of strength, the RBI said in its state of the economy report.