- The global community was subjected to tremendous hardships over the last two-and-a-half years of the pandemic-related challenges and the subsequent ongoing conflict between Russia and Ukraine has hugely disrupted the intercontinental supply chains. Of course, further compounded by the belligerence and uncamouflaged expansionist ambitions of China trying to disrupt the accepted global order is a fact. Left with no choice, the governments around the world had to resort to fiscal tightening measures which only added to the miseries of the common citizens. When everything appeared to be going downhill on the economic front, there appears to be some silver lining on the horizon as the soaring inflationary trends are showing definite signs of cooling off.
PC: Babajide Komolafe
- The Indian economic scenario to is no different from other countries. The government machinery led by the Reserve Bank of India took a few much-needed initiatives to ensure the inflation does not breach the acceptable threshold set for the purpose. Now that the cooling appears imminent, the authorities would breathe easy since it’s an important development as it lowers the risks of macroeconomic instability and, thereby, creates a more favourable environment for economic growth. Globally, the sharp decline in food prices in July is perhaps the most positive development. Note that the FAO Food Price Index in July was 140.9 points and an 8.6% reduction in relation to June. It’s the steepest monthly fall since October 2008.
- How the emerging situation favors India? For India, falling crude prices are more significant. The monthly average price so far is $97.2/barrel in August, the first time it’s likely to stay below $100/barrel since February. The combined effect of cooling energy and food prices is that India’s consumer price index in July was 6.7% the third straight sequential decline. None of these developments indicate that the inflation challenge has ended. Nonetheless, it’s still above RBI’s tolerance threshold of 6%. But the data shows that the pace of increase in the price level is slowing down. This data guide RBI’s monetary policy committee’s calls on interest rates. Yes, the repo rate has been increased by 1.4 percentage points to the current level of 5.4%.
PC: Anushruti Singh
- Of course, the sharp increases in interest rates were influenced by the surge in energy and commodity prices after Russia invaded Ukraine. The rate increases were front-loaded to head off the second-round effects of these price increases. The impact was sharp. About 40% of bank loans are benchmarked to the repo, which has meant that borrowers have felt the impact of monetary tightening almost immediately. SBI Research estimated an increase in interest cost by about Rs. 42,500 crores for retail and MSME borrowers. Thus, it makes sense for the MPC to recalibrate its stance to be in sync with the moderating/easing of interest rates. The situation calls for MPC to be nimbler in its thinking going forward. Hopefully, it does on expected lines.
