According to the April edition of its bulletin, the Reserve Bank of India (RBI) has cautioned that possible second-round effects amid the ongoing conflict in West Asia, where supply shocks may translate into demand-side pressures, require careful and continued assessment.The bulletin said that the ceasefire between the United States and Iran has provided some relief to the global economy, but the overall macroeconomic environment remains uncertain due to persistent geopolitical tensions.It highlighted that there has been a significant change in the global macroeconomic environment due to supply chain disruptions and rising energy costs associated with the Middle East crisis. Increasing volatility in commodity prices and financial markets has further increased the uncertainty.“Potential second-round effects with supply shocks turning into demand shocks also require careful and continued assessment,” it said.The RBI’s reference to “second round effects” means that the initial impact of supply-side disruptions, such as higher energy costs and supply chain issues due to the West Asia conflict, may gradually spread to the broader economy and also impact demand conditions.For example, rising input and fuel costs can increase overall prices, which can then affect consumer spending and business activity.The RBI said this transition from supply shocks to macroeconomic stress requires careful and sustained monitoring, as it could lead to upside risks to both inflation and growth if the situation persists and supply chains are not restored in a timely manner.While inflation currently remains within the tolerance range, the RBI said upside risks have increased due to supply-side disruptions, including uncertainties related to weather conditions.Despite these challenges, the central bank stressed that strong macroeconomic fundamentals are expected to support the Indian economy and help it remain resilient in the face of such shocks.The bulletin also reported that the conflict increased pressure on global supply chains in March, although the first half of April saw some easing.On the domestic front, economic activity showed resilience across many sectors, although some sectors experienced a slowdown. Consumer price index (CPI) inflation rose marginally in March due to fuel and food prices.The RBI also noted that financial markets witnessed some stability following the temporary ceasefire, with money market conditions and bond yields easing. In the external sector, a slowdown in imports and expansion in exports helped reduce the trade deficit to a nine-month low.It said foreign portfolio investment (FPI) inflows remained volatile during the period, while net foreign direct investment (FDI) turned positive in February.
