RBI concern over sharp decline in demand

In its “State of the Economy” report released on 23 April, the Reserve Bank of India has warned that, supply disruptions caused by the nearly two-month-long conflict in West Asia could eventually lead to a significant decline in demand. In such a scenario, the situation will require very close and careful assessment.

The report also noted that the temporary ceasefire between the United States and Iran has provided some relief to the global economy. According to the report, India’s strong macroeconomic fundamentals will help the economy withstand such external shocks.

However, the RBI cautioned that if the conflict continues and supply chains are not restored quickly, several challenges could emerge for the domestic economy.

Commenting on the sharp depreciation of the rupee in March, the RBI stated that the temporary ceasefire announcement and its policy measures provided some support to the currency in early April. In March, the rupee had depreciated by more than 4 percent against the US dollar, making it Asia’s worst-performing currency during that period. Although regulatory measures later stabilized the currency, the rupee has once again come under pressure following the relaxation of certain restrictions.

The report highlighted that domestic economic activity has remained strong in several sectors, although some areas have shown signs of weakness. Early indicators of slowing economic momentum are becoming visible in select data points, including port cargo volumes, air traffic, and purchasing managers’ assessments.

It also noted a decline in output across the eight core industries. Reduced production of fertilizers, crude oil, coal, and electricity has brought the growth of core sector output to its lowest level in 19 months.

Furthermore, the RBI’s forward-looking surveys indicate that consumer confidence regarding the current economic situation is weakening, business optimism has softened, and cost pressures are increasing.

The report emphasized that the government’s prompt supply management measures have helped contain inflationary pressures arising from supply-side disruptions.

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