Rising oil prices and disruptions to energy transit routes have emerged as key external risks, though they have yet to materially derail the growth outlook, helped by India’s diversified crude sourcing strategy and ability to secure alternative supplies. Factoring in to some extent the spillover from higher input costs and heightened global uncertainty, we expect the growth momentum to soften in the second half of the year but keep our annual growth forecast at 7.3% year-on-year this year. Inflation is likely to settle into a higher level after two years of benign rates.
The record build-up in the Reserve Bank of India’s foreign reserves has changed the policy calculus, providing policymakers with a substantial buffer against forex volatility, commodity price shocks, and swings in global risk sentiments. Hence, the economy is heading to a period of greater uncertainty with considerably more policy flexibility than in earlier cycles.
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When the dust settles, focus will also be on the bunched-up maturities of foreign currency non-resident (FCNR) deposits that will fall due in three-five years. A portion of the existing foreign reserve stock could be earmarked against these liabilities, helping to mitigate concerns that deposit maturities or debt repayments could trigger a sharp increase in dollar demand and exert pressure on the forex market down the line.
In the near term, priorities will be to manage liquidity, gradually lower the sizable forwards book and support the domestic currency. Long-end yields continue to be influenced by the hardening global yields.