- Few transformative occurrences over the last few months have steadily contributed to the rising inflationary trends across the world, including the Indian economic scenario. Apart from the cascading effects of the pandemic-induced restrictions severely corroding the nation’s economic stability to a great extent, the ongoing Russia and Ukraine conflict have only further exacerbated the already muddied waters. The resultant outcome is severe disruptions in the global supply chains rendering every country affected in one or the other way leading to inflationary trends. The Indian think tank has initiated several measures to tide over the financial hardships being encountered by the citizens. However, the situation continues to remain far from satisfactory.
PC: Carmen Reinhart & Clemens Graf Von Luckner
- The Reserve Bank of India is at the forefront of introducing measures to buffer the adversarial challenges confronting the nation. One such measure was recently introduced by the RBI to encourage foreign exchange inflows aiming to ensure macroeconomic stability, though temporary in nature at best. These measures will work mainly through three channels. Incremental deposits raised till November through Foreign Currency Non-Resident (FCNR) and Non-Resident External Accounts don’t have to meet regulatory requirements such as cash reserve ratio which makes it a relatively more attractive option for banks. There’s another set of measures to attract foreign portfolio investment (FPI) into debt.
- Further, conditions that need to be met by Indian firms planning to raise debt abroad have been eased too. Note that India’s foreign exchange reserve position is comfortable at $593 billion. Nonetheless, as we run a current account deficit, for the most part, accumulated reserves are relatively less stable. The reason is uncertain global economic and financial conditions leading to sudden outflows, a sharp currency depreciation, and an adverse impact on inflation as we are a net commodity importer. Of course, adequate foreign exchange reserves act as a shock absorber and allow RBI to smoothen currency depreciation. This has a positive spin-off on the domestic economic environment, including for farmers who depend on fertilizer imports.
PC: Reddy Shyam Shankar
- As a consequence, the rupee has depreciated by only about 4% against the US dollar since April despite global volatility. Welcomingly, the rising price trend appears to have lost some steam. The Indian crude basket was $104/barrel last Wednesday, more than 10% lower than the price level which prevailed a few weeks ago. Similarly, in the case of other commodities such as urea, copper, aluminium, and sunflower oil, prices declined. Hearteningly, even though there was a surge in March and April, its adverse impact on demand led to an easing of 10-30% in prices of some key commodities in June. Mind you, global financial conditions are yet to stabilize. Thus, RBI’s move to encourage capital inflows when macroeconomic indicators are cooling is prudent.
