‘El Nino, crude prices threats to India’s growth’

NEW DELHI:  The government sees OPEC’s (organization of the petroleum exporting countries) crude oil output cut, impact of EI Nino on Indian monsoon and the financial sector turmoil in developed countries as downside risk to India’s 6.5% GDP growth estimate in FY24, the finance ministry said in its monthly economic review on Monday. 

Though the ministry sees the financial sector turmoil in the US and Europe impacting credit growth in India, it reiterated that domestic banking system is considerably less prone to the vulnerabilities in the developed countries.

The GDP estimates for FY24 at 6.5% are in line with World Bank and Asian Development Bank, however, the report said the country needs to be vigilant against the potential risks such as El Nino creating drought conditions and elevating prices of agri products, geopolitical developments and global financial instability. According to the report, all these three could affect the favourable combination of growth and inflation outcomes currently anticipated.

OPEC, a group of oil producing countries, recently announced a 3.66 million barrel per day cut in production. The move may lead to crude oil prices going up by $10 a barrel.  El Nino, a condition marked by increase in ocean temperature, may lead to below normal Monsoon in India in 2023.

In the context of recent collapses of a few banks in the US and Europe, the ministry said the RBI’s supervision over banks and financial institutions is robust. Investment in held-to-maturity (HTM) securities is limited to 23% of deposits, reflecting an effective insulation of asset value from adverse market developments.

Silicon Valley Bank, which collapsed due to sharp decline in value of its HTM bonds, has 43% of deposits invested in such bonds. “Loans constitute over 50% of total assets of top 10 Indian banks, thereby making them relatively immune to yield spikes. Finally, rapid withdrawal of deposits is unlikely as 63% of deposits contributed by households are considered sticky. As over 60% of deposits are held by public sector banks, depositors in India are reassured about the safety of their savings,” said RBI.

GDP on expected lines

GDP estimates for FY24 at 6.5% are in line with World Bank and ADB. The report said India needs to be vigilant against potential risks like El Nino creating drought conditions, elevating agri product prices, geopolitical developments and global financial instability. As per the report, these 3 could affect the favourable combination of growth and inflation outcomes currently anticipated