RBI sees resilient economy despite West Asia conflict, monsoon concerns

India’s central bank reiterated that the economy remains resilient, but the Iran war and a deficient monsoon could pose risks to the outlook, according to its monthly economic report.

“The domestic economy has navigated the external uncertainties well, underpinned by healthy demand conditions and resilient performance of the industrial and services sector,” the Reserve Bank of India said in its State of the Economy report for July, released Wednesday. High-frequency indicators also suggested robust industrial performance and a resilient services sector, it said.

The RBI is widely expected to keep interest rates unchanged at its Aug. 5 policy meeting, making it one of the few central banks in the region that has not changed policy in response to the Middle East conflict.

Governor Sanjay Malhotra has indicated that the policy rate is likely to remain at 5.25 per cent, unless price pressures become broader.

The southwest monsoon, which accounts for about 70 per cent of India’s annual rainfall, is vital for the $300 billion farm economy and has an outsized influence on food prices, rural demand and broader economic output. The Iran war adds another risk, with India importing more than 85 per cent of its crude oil needs, raising the risk of imported inflation.

Despite the headwinds, the central bank expects the economy to grow 6.6 per cent in the fiscal year through March. It projects inflation to average 5.1 per cent, citing risks from higher oil prices and an uneven monsoon that has delayed the sowing of some key crops.

In its latest report, the RBI said “the farm sector is witnessing an uneven southwest monsoon, but the impact on food inflation may be mitigated by comfortable foodgrain stocks.”