The surge in commodity prices as a result of the war in Ukraine will have several repercussions for India’s economy. As a major net commodity importer, its terms of trade will deteriorate and we think the current account deficit could reach almost 4% of GDP this year. In terms of the domestic impact, higher commodity prices will eat into firms’ profit margins and weigh on investment. Household spending will also take a hit, albeit to a lesser extent. Consequently, we have lowered our GDP growth forecast for 2022, and we have also revised up our inflation forecasts for this year. The RBI has continued to emphasise its commitment to supporting the economy but, faced with a sustained period of above-target inflation and the risk of inflation expectations becoming unmoored, we think it will proceed with policy normalisation over the coming months.
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