India has a six-sided buffer, including a favourable growth differential, lower inflation than a large number of its trading partners, a forex reserve cushion and a sound banking system built around its economy, which every financial market participant must keep in mind, according to Reserve Bank of India Governor Shaktikanta Das.

Das emphasised that India is widely perceived to be among the fastest growing major economies in the world in 2022, when the other major economies may encounter recession or considerable moderation in their growth momentum.

“The favourable growth differential of India provides confidence to investors. This is amply reflected in the surge of portfolio flows into India since July 2022. Inflows in August alone, at $ 7.5 billion, are more than 16 times the net inflows in July,” he said at the FIMMDA Annual Event.

‘Terms of trade shock eased’

The Governor observed that the recent softening of commodity prices and supply chain pressures have eased the terms of the trade shock that India faced in the aftermath of the pandemic and the war.

With the consequent easing of imported inflation pressures, India’s CPI inflation peaked in April 2022, he said.

Further, the average Indian basket crude price in August at $97.4 per barrel has turned out to be lower than what we had assumed for the full year at $105 per barrel in the monetary policy resolution of August 5. In fact, India’s inflation is lower than a large number of its trading partners.

Das noted that the shift in the commodity price outlook is also altering the assessment of India’s current account deficit in 2022–23, which is now expected to remain well within sustainable levels.

“At a time when food security is threatened the world over by shortages and soaring prices, India’s large buffer stocks of food grains supplement domestic supply and assure food security domestically,” he said.

Das underscored that India’s foreign exchange reserves of $ 561 billion (as on August 26) provide a cushion against external shocks, as is being demonstrated on a day-to-day basis. Moreover, the reserves are also reinforced by forward assets.

Banking system

“The health of our banking system is sound. It is well capitalised and well provisioned, with improved asset quality. This constitutes a key pillar of financial stability and is expected to provide positive spillovers for the financial markets,” he said.

According to Das, reflecting these fundamental factors, the rupee has moved in an orderly manner in the current financial year so far.

“It has held its own in a world of sharp depreciation across other emerging market economy and advanced economy currencies.”

“While the US dollar has appreciated by 11.8 per cent during the current financial year so far, the INR has depreciated by 5.1 per cent, which is among the lowest in the world,” the Governor said.

The RBI is in the market on a regular basis, providing liquidity and confidence so as to facilitate its smooth and normal functioning.

Monetary policy

Going forward, the monetary policy will remain watchful, nimble-footed, and calibrated in order to ensure price stability while supporting growth, Das said.

The Governor said there are some areas, such as delivery of services to small and retail customers, where the performance of market participants can improve further.

“While there has been a steady increase in the quantum of secondary market trades under the RBI Retail Direct Scheme, there remains considerable scope for improvement in ensuring liquidity for retail investors throughout market hours on the NDS-OM platform.”

“We continue to get representations from customers—particularly those undertaking forex transactions with small ticket sizes—about the fair pricing of forex products,” he said.

A research study by some officers in the RBI found empirical evidence of the presence of considerable price discrimination in the OTC currency derivatives market. The services provided by banks on the FXRetail platform need special attention. The response time and onboarding of customers on the platform can be faster.

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