The Reserve Bank of India (RBI) has said the Indian economy is navigating a path of recovery amid increased global macro-financial risks and highly uncertain outlook. In its Financial Stability Report issued on Thursday, the RBI said the Indian economy has been consolidating a recovery led by robust revival of agriculture and services, and stable corporate performance.

“Amid economic, financial and political shocks, global macrofinancial risks have increased and the outlook is highly uncertain. Despite international spillovers and a challenging global environment, the Indian economy is navigating a path of recovery. In the Indian financial system, healthier balance sheets are enabling a robust recovery of credit flows even as profitability is improving,” the banking regulator said in the report.

“Since the June 2022 issue of the Financial Stability Report (FSR), the global economic outlook has deteriorated further. Risks to financial stability have become accentuated as central banks have aggressively front-loaded monetary policy tightening synchronously across countries and have given hawkish forward guidance,” it added, pointing out that international organisations, including the International Monetary Fund (IMF), the World Bank (WB) and the Organisation for Economic Co-operation and Development (OECD) have downgraded their global growth projections relative to their previous revisions.

The report said the global outlook for 2023 is even bleaker, with global growth expected to fall to 2.7%, with both advanced economies (AEs) and emerging market and developing economies (EMDEs) forecast to experience significant output slowdown. “Global trade volume is also expected to decelerate from 10.1% in 2021 to 4.3% in 2022, with EMDEs bearing the brunt. Inflation is forecast to rise to 8.8% in 2022, with both headline and core inflation staying well above targets in AEs and EMDEs,” it added.

On the domestic front, the report pointed out the Indian economy has been consolidating a recovery interrupted by waves of the pandemic on the back of a robust revival of agriculture and services, stable corporate performance, in spite of the incidence of rising input costs, business and consumer optimism, and supported by a sound financial system. “This innate resilience has helped the economy to withstand extraordinary external shocks, especially prolonged geo-political hostilities. Nevertheless, it remains vulnerable to formidable global headwinds, which act as a drag on the domestic economic recovery,” it said.

“The strengthening of the recovery in Q3, 2022-23 is reflected in high-frequency indicators, especially those relating to the contact intensive sectors. India’s purchasing managers’ indices (PMI) for both manufacturing and services outperformed regional and global indices in October and November,” it added.

On inflation, the report pointed out that headline consumer price index (CPI) inflation, after remaining above the upper tolerance band of the inflation target range since January 2022, has moderated. “While this outcome reflects a series of shocks to food and energy prices, the persistence and broadening of core inflation may continue to exert pressure on inflation going forward. Frontloaded monetary policy actions are expected to bring inflation into the tolerance band and closer to the target while anchoring inflation expectations,” it added.

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