Global Economy: Amid heightened risks to the global economy, RBI says India’s external vulnerability indicators show resilience

NEW DELHI – Amid global economic turmoil caused by Russia’s invasion of Ukraine and the US Federal Reserve’s monetary tightening plans, India’s central bank believes the country’s economic fundamentals would help it through the global storm.

“…external vulnerability indicators are showing resilience and strengthening domestic macroeconomic fundamentals would help the economy withstand the fallout from potential negative global macro-financial shocks,” the Reserve Bank of India said in its annual report for 2020- 21.

The war in Ukraine has greatly heightened inflation risks for India, as the conflict has driven global commodity prices soaring by disrupting supply chains.

Crude oil prices, for example, have soared around 50% so far in 2022, putting significant price pressure on India, which imports more than 80% of its fuel needs.

The latest data showed that India’s consumer price index-based inflation was 7.79%, well above the 2-6% range imposed by the RBI.

In the annual report, the RBI said that the outlook for India’s external sector is plagued by headwinds and tailwinds going forward.


Positive drivers include exports, which have shown resilience in a hostile trade environment and could strengthen as external demand and price conditions turn favorable as geopolitical tensions ease, the report said.

By contrast, the main risks stemmed from a likely slowdown in the pace of growth in major advanced economies and emerging market economies, high energy prices and further supply disruptions in a geopolitical environment characterized by Conflicts.

“A more rapid tightening of monetary policy in major economies due to high inflation in those economies may also impact financial conditions in emerging markets,” the report said.

India’s external debt as a percentage of GDP remains lower than most of its emerging market peers, according to the RBI report.

Driven mainly by general allocations of Special Drawing Rights by the International Monetary Fund in August 2021, India’s external debt recorded an increase of $41.2 billion – an increase of 7.2% – at the end of December 2021 compared to March 2021, according to the report.

However, as a proportion of the country’s GDP, external debt moderated to 20% from 21.2% over the same period, the RBI said.

Within external borrowings, the largest share remained that of commercial borrowings at 36.8%, followed by non-resident deposits at 23.1%. Short-term trade credit was 18.0%, according to the report.

According to the RBI, the increase in foreign exchange reserves has implied an improvement in India’s reserve adequacy indicators, which bodes well for the mitigation of external risks.

Foreign exchange reserves at end-March 2022 provided cover for 10 months of projected imports for 2022-23, the report said.

“India’s foreign exchange reserves, which stood at $607.3 billion at the end of March 2022, were bolstered by the IMF’s general SDR allocations of SDR 12.57 billion to India in August 2021. In 2021-22, India’s reserve accumulation (including valuation changes) stood at $30.3 billion.

Shirlene J. Manley