Speaking on Friday, Reserve Bank of India (RBI) Governor Sanjay Malhotra warned that restrictive trade policies, especially those stemming from the Trump administration era, pose a significant threat, potentially inflicting irreversible damage on the growth trajectories of certain economies. He emphasized that the full extent of these risks has not yet been factored into market assessments.
Addressing the Kautilya Economic Conclave, Mr. Malhotra acknowledged the surprising resilience of the global economy thus far. “Despite high U.S. tariffs, persistent trade restrictions, and ongoing uncertainties, global growth has remained robust, consistently exceeding initial projections,” he noted. However, he cautioned that while the immediate, tangible impacts on the real economy have been minimal, the long-term consequences of these complex dynamics remain to be seen.
Nonetheless, the Governor stressed that the world economy is likely to perform below its true potential for the foreseeable future, largely due to increasingly divergent growth patterns among nations.
He reiterated his concern, stating, “Furthermore, the prevailing global trade environment, coupled with its associated restrictions, carries the potential to inflict lasting, perhaps permanent, harm on economic growth in several countries.”
Malhotra highlighted the widespread fiscal stress impacting nearly every nation globally. He raised concerns about how these situations could be normalized, especially if the world enters a prolonged period of subdued economic growth, stating that the path forward remains unclear.
He described this as a collective risk, particularly given that current conditions are not marked by rampant inflation, even though some major economies are experiencing inflation slightly above their targets.
The RBI Governor observed that bond markets are only partially accounting for these fiscal risks, while equity markets continue their upward trend. “Although central banks in advanced economies are deeply concerned about rising public debt and the potential for a disruptive resolution, it appears the full spectrum of risks might not be adequately priced in,” he remarked.
He warned that this scenario “raises the specter of fiscal dominance, where monetary policy decisions could be unduly influenced by the imperative to maintain debt sustainability.”
Malhotra also suggested that equity markets, particularly global stock indices, appear somewhat complacent.
He cautioned, “Their notable buoyancy, driven largely by technology stocks, sparks concerns that a market correction could be on the horizon.”
Mr. Malhotra concluded that the combination of tariffs and the widespread burden of high public debt across the globe would, in all probability, exert a substantial impact on individual economies and, by extension, the entire global economic landscape.
He reiterated, “Presently, it seems these inherent risks are not fully reflected in equity market valuations, and there’s also a growing tolerance for inflation. Although inflation remains within a certain range across most developed nations, it generally hovers slightly above established targets.”
Malhotra suggested that gold prices are now mirroring the role oil once played, serving as a key indicator of escalating global uncertainty.
Despite the significant uncertainty, he noted a recent easing in global financial conditions. “Immediate risks to global financial stability have either diminished or are not currently apparent,” he affirmed.
Turning to India, the Governor highlighted that even amidst this turbulent and uncertain global period, the nation’s macroeconomic fundamentals have remained exceptionally strong, a testament to decades of diligent foundational work.
He elaborated on India’s strengths: “We boast robust foreign exchange reserves, consistently low inflation since February, a manageable current account deficit, a highly credible path towards fiscal consolidation, and exceptionally strong balance sheets across our banking sector and corporate entities.”
Malhotra attributed this stability to “unwavering commitment to macroeconomic stability, price control, financial health, and even consistent policy, irrespective of governmental changes.”
The Governor emphasized that “the sustained momentum of reforms and the integration of global best practices, carefully adapted to our unique domestic needs and national priorities, represent a collaborative effort by governments, policymakers, and regulators alike. Despite recent challenges, the economy has found a steady footing, achieving a state of resilient growth equilibrium.”
He concluded by stating, “This achievement is particularly remarkable for a large emerging market and positions India as a steadfast anchor of stability in an otherwise volatile global environment.”