Geopolitics stir inflation risks, put India’s growth on watch

Inflation is creeping up. Conflict in the Persian Gulf is likely to add to pressure. The effect, though, should be muted by transient surge in energy prices and their incomplete transmission at the retail level. There will be knock-on effects on metals and other commodities in line with the duration of trade disruption. Stable core inflation is expected to create the space for an extended period of accommodative monetary policy, which may be called for to curb financial market volatility caused by the West Asia situation. The rupee's slide will contribute to an extended pause in interest rates.

Risks to growth from geopolitical uncertainty are higher. Surging metal prices pose challenges to industrial growth. Domestic demand remains resilient on the back of tax cuts. But exports have been squeezed by US tariffs and are likely to face extended shipping disruptions. The trade scenario remains uncertain due to new US investigations involving India, and expected delays in signing a deal with Washington. Downside risks to growth will also weigh in favour of monetary accommodation, particularly if data indicate a further loss of economic momentum. It will take months after the West Asia conflict ends for global supply chains to stabilise. Policymaking will be cautious over this extended window.

Need for stability on the export front will become more evident as the stimulus for domestic consumption runs its course. Consumption is accelerating sequentially. But government expenditure and private investment could do with some vigour. India may not have to deal with a full-blown energy shock yet. But it will have to keep working on its growth drivers.