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Upbeat mood in India decoupled from pessimism in rich countries

To combat the cost of living crisis, the central banks of most countries have raised interest rates and curbed excess money supply

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TNC Rajagopalan
3 min read Last Updated : Oct 30 2022 | 10:57 PM IST
Amidst rising geopolitical tensions and global economic uncertainty, the Reserve Bank of India (RBI) has scheduled an additional meeting of the Monetary Policy Committee (MPC) this Thursday. The decision of the MPC and future guidance of the RBI governor, especially on whether India is decoupled from the global economic turmoil, will be watched with great interest.

The end of the Russia-Ukraine war is nowhere in sight. North Korea is repeatedly firing missiles near Japan and South Korea. China is determined to integrate Taiwan with itself. The hardening stances of the parties involved in these regions have dwarfed the tensions in other conflict zones. The strident rhetoric from leaders of major global powers has only worsened the worries of major military escalations.

Inflation is high across the globe due to pandemic-induced excess liquidity, especially in rich countries and flare-ups in global food, fertilizer, fuel and commodity prices, and other supply-side disruptions caused by the war in Ukraine. To combat the cost of living crisis, the central banks of most countries have raised interest rates and curbed excess money supply. Last week, Canada’s central bank raised its benchmark interest rate by a smaller-than-expected 0.5 percentage points, but the European Central Bank raised the rate by 0.75 percentage points. The United States Federal Reserve is expected to raise the interest rate by 0.75 percentage points in its next meeting.   

The widespread apprehension is that higher interest rates and aggressive forward guidance by the central banks are nudging most major economies towards recession or at least a sharp economic slowdown, although the United States did report positive growth rate for the third quarter of this calendar year. Consequently, the commodity prices have softened somewhat. The European natural-gas prices fell below €100 per megawatt hour for the first time since Russia cut its supplies in June. Last week, the Chinese stocks fell sharply. The index tracking American-listed shares of Chinese companies has fallen by more than half in a year. The offshore Yuan hit its weakest level against the dollar since 2008.

Indian equity markets, however, were in a celebratory mood with the BSE Sensex hovering around 60,000 despite prospects of exports growth slowing down due to falling external demand, private investment yet to pick up, inflation remaining well above the upper limit of 6 per cent since last year, expected fall in domestic demand after the festival season and high fiscal deficit and current account deficit — all pointing to growth rate of around 6 per cent during the current financial year.

The markets have ignored the warning of the RBI governor that the future trajectory remains clouded with uncertainties arising from continuing geopolitical conflicts, possibility of further supply disruptions, volatile financial market conditions, and domestic weather-related factors. They seem more reassured by his statement that he remains optimistic about the future prospects of the Indian economy and that the need of the hour is calibrated monetary policy action, with a clear understanding that it is required for sustaining our medium-term growth prospects.

The upbeat mood in India, in sharp contrast to the pessimism in the advanced economies, raises the question whether the Indian economy is decoupled from the global economy. “Time will tell,” said the RBI report on the state of the economy, a few weeks back.
email:tncrajagopalan@gmail.com

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Topics :InflationBS OpinionMPCRBI Policy

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