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Informist, Saturday, Jan. 18, 2025

 

 

NEW DELHI – Geopolitical risks have been increasingly pervasive in shaping India's trade and financial dynamics. The use of strategic measures would be better suited to reduce the impact of these shocks, rather than moving the policy repo rate, according to Reserve Bank of India staff.

 

"Given the relative predominance of the trade channel over the financial channel and their countervailing pressures on the exchange rate, policymakers can envisage strategic responses with a suite of targeted interventions to neutralise these shocks than relying on broad-brush instruments like policy rate adjustments," the article said. It was published in the January RBI bulletin on Friday, titled 'Geopolitical Risk and Trade and Capital Flows to India'.

 

The article was written by RBI staff, including Michael Patra, whose tenure as deputy governor ended on Tuesday. The views expressed in the article do not reflect the central bank's official stance. Among the geopolitical risks it mentioned were the war in Ukraine, which began in 2022, the conflict in the Weat Asia, disruptions caused to shipping, and political spillovers from elections.

 

The study showed that one standard deviation shock in the world's Geopolitical Risk Index hits India's trade flows by 1.0% and capital flows by only 0.3%. Such a shock in the index for India has a lower impact by 10 basis points each, the paper said. The impacts are not felt immediately--the shock translates to the trade-to-GDP ratio and capital flows only after six-eight quarters.

 

For trade, India could diversify trade sources and participate in larger trade agreements, including free-trade areas and global trade blocs, the article said. Investments in infrastructure such as logistics and ports could also position India as a global shipping hub, reducing the trade impact.

 

From the financial market perspective, building strategic buffers and forging bilateral swap agreements could bring down the impact, since the transmission of these shocks is through adjustments in terms of trade and the exchange rate, RBI staff said. India should also engage with multilateral institutions for geopolitical risk mitigation strategies to resolve any disruptions, the article said.

 

"These strategies, combined with a robust safety net, can equip the Indian economy to navigate the complexities of persistent geopolitical risks effectively," the article said.  End

 

Reported by Aaryan Khanna

Edited by Akul Nishant Akhoury

 

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