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India not immune to global tremors, says RBI 30 Aug, 2008, 0845 hrs IST, ET Bureau

MUMBAI: Even as analysts talk about India continuing to be the second-fastest-growing economy, the Reserve Bank of India (RBI) has sought to inject some caution. The central bank has said the resilience of India and other emerging markets cannot be guaranteed and has warned about moderation in growth. In its annual report for 2007-08, the central bank also pointed out that there's uncertainty on how long the divergence between growth of advanced and emerging economies will continue. The annual report said outlook on capital flows to the emerging markets remains uncertain. On one hand, a massive injection of liquidity by central banks of developed economies has lead to large capital inflows to emerging markets. On the other hand, a change in global sentiments or monetary policy actions. "While emerging markets have remained resilient so far, there is uncertainty as to how long and to what extent the divergence of growth performance between advanced economies and emerging economy will persist in the future," said the report. The central bank has also pointed out that the global slowdown could have its impact on services sector since Indian BPO and IT-enabled services are mainly dependent on external market conditions. On one hand, cost-cutting measures in developed countries might increase outsourcing to India but on the other hand, a reduction in IT spending in these economies might work against BPO and IT-enabled services. Also Read  → It may be too soon to exit oil-dollar bet  → GDP hits 7.9 pc in Q1, slowest in three years  → RBI hints at stringent steps to rein in inflation  → No conclusion from one week's inflation: FM "As the global economy slows down, companies largely from developed economies, in their quest for reducing cost, might outsource a part of their operations to cheaper and efficient markets as India... As global slowdown has hit the financial services industry the most, outsourcing activities to India may decline as the financial services companies reduce their geographical operations," said RBI in its report. The central bank has said although the inflation risk continues, given that services constitute the predominant share of GDP, the adverse impact of fuel price pass through on the GDP may be somewhat lower, relative to other emerging markets. Unlike the global economy, which is expected to slowdown significantly, the Indian economy is expected to see slight moderation in growth. Monetary policy may be tightened to modulate demand due to increasing global concerns on account of inflation and inflationary expectations. But conducting monetary policy is getting complicated by global developments and domestic demand pressures. The central bank has also highlighted the importance of fiscal policy in pushing the demand in the economy. Fiscal concessions in the form of higher tax exemption limits and adjustment of slabs may enhance disposable limits and adjustment of tax slab could enhance spending power. This may have a positive impact on consumption demand, it said.