The current conflict and situation is a challenge for India

Geopolitical conditions and market-related developments have emerged as risks to India’s economic outlook.

From a geopolitical point of view, the war between Israel and Hamas continues. There remains uncertainty about whether it will accelerate further. If the conflict in West Asia increases, crude oil prices may increase further.

The Reserve Bank of India has used its foreign exchange reserves to keep the rupee stable while retail fuel prices remained unchanged. The Reserve Bank’s dollar selling is draining durable liquidity and oil marketing companies are grappling with under-recoveries in petrol and diesel.

How long policymakers will be able to maintain these protections will depend on how deep and how long lasting the shocks is. If these shocks are short-lived then security can remain intact. However, if the shocks continue for a long time, some changes will be visible.

For example, the more the Reserve Bank tries to save India’s currency through foreign exchange intervention, the more the currency reserves will decrease. Due to cash crunch, there may be upward pressure on domestic interest rates.

Similarly, if the burden of sustained high oil prices is not passed on to consumers, they will directly or indirectly impact fiscal pressures.

However, if these external pressures persist for a long time and/or increase, it will impact growth. Higher oil prices will impact trade terms. High uncertainty, weak trends and tight monetary conditions are not considered good for investment.

We should be prepared to deal with the shocks of good times and bad times. Monetary policy should ensure that real rates balance the need for saving and investment and that inflation remains close to target. Regulatory standards should ensure that credit creation is for productive reasons and not just for consumption.

India will not remain untouched by global influences; hence policy agility, prudence and flexibility will be very important.