- Coming close on the heels of the pandemic meltdown and the ongoing conflict between Russia-Ukraine has severely rendered the global economy devastating blows that are proving to be hard to overcome. The inflationary trends witnessed around the world are posing tremendous challenges to the countries that are leaving no stone unturned in introducing fiscally prudent measures to tide over the burgeoning crisis. The Indian establishment too has introduced effective economic measures in line with the pressing requirements to stay afloat. Nonetheless, common citizens are finding it extremely challenging to not only sustain their livelihoods in the face of inflationary trends but also face heat from the lack of opportunities to sail through.
- As you are aware, the global markets are proving to be quite volatile owing to the pressures of the undercurrents browsing around by affecting the primary money lenders like the banking sector. It was a crisis foretold. A week ago, all was well in the US financial system. Since then, three banks have collapsed, with Silicon Valley Bank being the most consequential one. As if on cue, American regulators, aware of the gravity of the situation, have invoked exception clauses in their playbook to insure deposits that weren’t earlier covered. They hope that it will tamp down on the panic and prevent contagion. Given the size and influence of the US financial system, all regulators must harbour the same hopes.
- Notably, two Indian reports warned of the impending risks a few weeks back. In December 2022, RBI’s bi-annual financial stability report flagged it. Next month, the Economic Survey highlighted the risks of financial contagion. Step back and look at the context. Last year, the world witnessed the most synchronized monetary tightening in 50 years by way of interest rate increases. The tightening also happened to be faster than commonly seen in earlier episodes. It took place on the heels of a build-up of private debt when interest rates were low, and a surge in inflation in 2022. In short, it was the recipe for a perfect storm as these conditions make it more likely that poor investment decisions will be caught out. On the face of it, India is not vulnerable.
- In the second quarter of 2022, the average core debt of the non-financial sector of the world was 248% of GDP. In the case of India, it was 170% of GDP, with only government debt at 82% close to the global average of 88%. But it would be unwise to drop one’s guard based on historical data. It was mainly because nominal GDP grew fast following a surge in inflation. The convulsions in the Indian money market in 2008 took policymakers by surprise. Since the heightened risk to financial stability in the backdrop of increasing rates is a phenomenon backed by considerable evidence, India’s policymakers must be prepared. Financial markets are increasingly interconnected and a large emerging market like India cannot decouple from the world. Watchfulness is warranted.