- The global financial challenges will exacerbate in the coming days cannot be disputed. No sooner than the pandemic-induced economic challenges singed the entire global community, the ill-timed and ill-advised Russian invasion of Ukraine has only added to the woes of the common citizens around the world. None of the countries, including the most advanced, can claim to have been unaffected by the unfurling events. As the northwards bound inflationary trends suggest, there is no respite visible in the foreseeable future for sure. Most economies are grappling with several challenges to address the cascading effect of the inflationary trends where the cost of living has increased manifolds in the last few months.
PC: Ilham Nagiyev
- The heat generated by the increasing commodity prices is eroding the confidence levels of the common citizens posing further headaches to policymakers. As if on cue, the global financial markets are also experiencing financial volatility making the task of policymakers even more challenging. The Indian financial market is not immune from the vagaries of the global phenomenon. No wonder, Indian financial markets were battered last Friday, in line with major global markets. The Bombay Stock Exchange Sensex closed lower by 1.7% at 58,098.92, while the rupee-dollar exchange rate hit a record low to end Friday’s trading at Rs 80.99. Reserve Bank of India’s monetary policy committee has to deal with fresh sets of challenges.
- As such, the bimonthly meeting of the monetary policy committee meeting scheduled for next week has to contend with risks coming largely from overseas. Right now, uncertainty and volatility are worryingly high. The main sources of risk are, first, the unclear trajectory of major central banks trying to pull back inflation and, second, fluid geopolitics. This week most major central banks increased interest rates and indicated more hikes are in store. Most currencies weakened against the dollar and Japan’s central bank made its first foreign exchange market intervention in over two decades. The hardening of interest rates will trigger a sharp economic slowdown in major economies. India’s exports will feel its impact.
- Note that the unusual aspect of today’s global economic scenario is that inflation is unlikely to quickly trend downwards even as demand falls. This is because of ongoing energy supply readjustments that have pushed economic activity and inflation in different directions. Look at how European gas and electricity prices have risen 105% and 75%, respectively, since the period just before the Russian invasion of Ukraine. The UK’s inflation, at 9.9%, is almost five times its inflation target. Thankfully, Indian Union Government has fiscal space as gross tax revenue increased 25% to Rs 8.69 lakh crore in April-July. Therefore, it makes sense to keep the fiscal powder dry in an extremely uncertain environment.