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The Indian economy is “well prepared” to handle any capital outflows caused by external shocks, the Ministry of Finance has said.
In its Monthly Economic Review report released on March 15, the finance ministry’s Department of Economic Affairs said India had “adequate” foreign exchange reserves to absorb the risks posed by the uncertain geopolitical environment.
“The geo-political crisis is still evolving and these are early days to make a plausible forecast of its impact on India’s economy in the year ahead. Yet India has braced well to meet the impact of rising commodity prices,” the Monthly Economic Review report for February said.
“Foreign exchange reserves continue to be at a record high and are large enough to finance more than 12 months of imports,” the report added.
As on March 4, India’s foreign exchange reserves stood at $ 631.92 billion.
Russia’s invasion of Ukraine has pushed up global commodity prices sharply. Risk-off pressures have also resulted in a sell-off in financial markets, including in India, putting pressure on the exchange rate. Last week, the Indian currency fell below the 77-per-dollar mark and to a new record low against the greenback.
“Foreign investors have largely stayed invested in the economy as the exchange rate depreciates on a flatter trajectory shaped by exceptional growth of exports. External debt, with one-third of its value denominated in Indian currency, is considerably light at 20 percent of GDP to accommodate deterioration of trade balance, if any,” the finance ministry’s report said.
While the ministry expressed confidence on the external front, it cautioned when it came to prices, saying the recent rise in food and commodity prices required “continued vigil on the inflation front”.
Data released on March 14 showed Consumer Price Index (CPI) inflation rose to an eight-month high of 6.07 percent in February – the 29th consecutive month in which it had exceeded the medium-term target of 4 percent and the second successive month in which it had come in above the upper-bound of the Reserve Bank of India’s (RBI) 2-6 percent mandate.
However, the finance ministry’s report said that while elevated energy and commodity prices posed upside risks to the inflation outlook in the near- to medium-term, “given the inherently unsustainable nature of high prices, international commodity prices are expected to level off early with increase in supplies outside the crisis zone”.
