There is a new geo-political crisis confronting the world. From India’s point of view, what kind of impact do you see?
At this point in time, we are trying to assess the impact. If you were to just think in terms of what could happen to oil prices, that’s one factor which will affect India. We haven’t done any analysis based on this new development but in general, a 10% increase in oil prices leads to a 0.15 basis points decline in global output, and a 0.4 percentage point increase in global inflation next year.
The World Economic Outlook has raised the inflation projection for India. Do you see rising crude prices posing a significant challenge?
What we’re seeing is inflation in Asia, in general, and in India coming down. We have attached an upside risk to inflation, because of commodity and oil prices. Any adverse impact on oil will have an upside risk for inflation. That’s why we’re saying that central banks should wait to see how inflation pans out. It’s data dependent. Until it’s not durably within target, don’t start, easing monetary policy. There’s no urgency to cut interest rates right now, given the upside risk to inflation.
RBI’s latest policy statement is seen as hawkish and it is now expected that high interest rates will remain for a longer period. What could this mean for the economy?RBI has been absolutely right in terms of tightening monetary policy because inflation has been above target. Only recently it has started coming down. Given the fact that it’s above target and there are upside risks to inflation, staying the course is important. That’s the advice we’re giving to all countries to make sure that you don’t start easing until inflation is durably at target. I would say that it should continue to stay the course until inflation comes down. I’m not saying tighten further. Given the fact that interest rates are likely to remain higher for longer, it’s very important that the fiscal situation also is under control. This is a time when you have to be conservative both on the monetary side and the fiscal side, both to bring inflation down durably to build fiscal buffers, and to make sure that you have space for long-term reforms.China‘s being seen as a growing worry. WEO has also flagged some concerns…
We have revised our numbers for China. It’s 5% growth for this year; 4.2% for next year. We’ve also lowered our long-term growth for China to 3.4% in 2028. This is a baseline scenario where they don’t do reforms. If they do reforms, then numbers will go up. What we see is the slowing of the Chinese economy is a risk to the whole region. Let’s look at it from two ways. Mechanical one, a percentage point decline in Chinese growth leads to 0.3 percentage point decline on average in four countries in the region. China’s slowing down will have a likely smaller impact on India, but for the region it will have an impact because China is a key player in global value chains.
