Indian Economy Maintains Stability Amid West Asia Conflict-Driven Energy Price and Input Cost Increases.

Indian Economy Remains Resilient Despite West Asia Conflict

The Indian economy has demonstrated stability in the face of rising energy prices and input costs, as well as supply chain disruptions, according to the Reserve Bank's (RBI) April Bulletin. The Bulletin, released on Thursday, states that the conflict in West Asia has intensified pressures on global supply chains in March, with some easing observed in the first half of April.

Domestic economic activity has shown resilience in many segments, with a slowdown in a few others. However, the conflict poses significant upside risks for inflation, driven by supply-side disruptions, including weather-related uncertainties. The Bulletin notes that possible second-round effects, with the supply shock transforming into a demand shock, warrant careful and continuous assessment.

The temporary two-week ceasefire between the US and Iran has provided some relief to the global economy, and the strong macroeconomic fundamentals of the Indian economy should support its resilience to withstand such shocks. The article highlights that the Indian economy continues to hold its ground despite facing a major supply shock due to the conflict in West Asia.

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In March, available high-frequency indicators of economic activity displayed divergent trends, with demand conditions remaining resilient despite some pockets of slowdown in economic momentum. The rural economy played an important role in sustaining resilience in demand in March. Automobile sales growth was driven by strong retail demand supported by post-GST momentum, and increased electric vehicle (EV) demand, particularly in the two-wheeler segment, also contributed to the overall momentum.

The ongoing conflict in West Asia has negatively impacted trade, with India relying heavily on Gulf shipping routes. This led to an average 54 per cent decline in exports and imports from West Asia in March. Imports from Russia saw a sequential uptick. 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. Foreign portfolio investment (FPI) flows remained volatile, although net foreign direct investment (FDI) turned positive in February.

The central bank notes that the views expressed in the Bulletin article are those of the authors and do not represent the views of the Reserve Bank of India.

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