The report has also warned against a possible demand shock and financial market turmoil if the West Asia conflict continues for a longer period.
“If the conflict persists and supply chains are not restored early, it may create challenges to the domestic economy in the form of higher energy costs, input cost pressures, disruption in trade flows and financial market spillovers,” the monthly report said.
“Possible second round effects with the supply shock transforming itself into demand shock also warrant careful and continuous assessment,” it added.
The retail inflation, measured by the Consumer Price Index (CPI), inched up to 3.4% in March from 3.2% in February, mainly on account of higher food and fuel inflation. The core inflation, which reflects the CPI excluding food and fuel inflation, remained stable, indicating that the underlying price pressures could be largely contained.
The temporary two-week ceasefire between the US and Iran has provided some breather to the global economy, which has been undergoing a significant shift following the supply chain disruptions and rising energy costs.
However, further intensification of the conflict, its prolongation and widening geographical spread pose the key downside risks to the global growth outlook, the report said, while highlighting India’s strong macroeconomic fundamentals should support the economy to withstand such shocks. The global economic activity already moderated to an 11-month low as momentum weakened across manufacturing and services sectors.”The Indian economy continues to hold its ground despite facing a major supply shock due to the conflict in West Asia,” the monthly report said highlighting that domestic high-frequency indicators for March do not reflect much adverse impact of the global supply chain bottlenecks as some of the key risks have been contained by the government, by ensuring availability of petroleum products across the country.
The monthly economic report was prepared by the central bank researchers under the guidance of deputy governor Poonam Gupta.
The conflict in West Asia has intensified pressures on the global supply chains in March with some easing observed in the first half of April. Domestic economic activity and overall demand conditions remained resilient with greater support from the rural segment. However, early signs of deceleration are visible in select indicators like port cargo, air passenger traffic and the outlook of purchasing managers, the report said.
Meanwhile, the money market and bond yields moderated after the temporary ceasefire in West Asia. A slowdown in imports and expansion in exports narrowed the trade deficit to a nine-month low. The net foreign direct investment (FDI) turned positive in February although foreign portfolio investment (FPI) flows remained volatile.
Nevertheless, business optimism fell to a five month low in March, one of its weakest levels since the pandemic. RBI’s forward looking surveys also pointed towards softening consumer confidence on the current situation and moderation in business optimism along with buildup of cost pressures.