- The pandemic played havoc with the entire global community for over two years and is there for all to witness. The aftermath of the devastating effects of the pandemic is still being felt across needs no further elaboration. No sooner the citizens across the universe started to feel what a normal life would be as normalcy returned post-pandemic, the ongoing Russia-Ukraine conflict only further exacerbated the citizens’ woes as the global supply chains were severely affected. The resultant outcome was rising inflationary trends on the back of key commodities prices heading northwards singeing the entire population irrespective of the standing in the world development index. The Indian population is feeling the heat on many fronts.
PC: AMAN KUMAR
- Rising commodity prices, lack of job opportunities, gloomy employment scenarios, a stuttering economy, and a general air of uncertainty prevailing in the country have posed challenges to the Union Government and the Reserve Bank of India to come out with prudent fiscal measures. To its credit, the RBI is at the forefront while attempting to keep the inflationary trends at manageable levels. As another measure, RBI yesterday hiked the policy rate, or repo, by 0.5 percentage points to 5.9%. It was an anticipated fourth increase since May, The analysis underpinning the monetary tightening throws up interesting information. Hopefully, the depreciation in the rupee against the dollar and the dip in the forex reserves are not alarming.
- Note that since April 1, the rupee dropped 6.8% against the dollar, while a basket of major currencies depreciated 16%. Also, about 60% of the dip in foreign exchange reserves is because of changes in their valuation following rate hikes by the US Federal Reserve. However, the trajectory of inflation is clouded by global uncertainty. RBI acknowledged it but retained the current financial year’s inflation projection at 6.7%. Economic growth, however, was marked down to 7% from the earlier 7.2%. Prima facie, the main aim of the current cycle of rate hikes is to head off the second-round effects of inflation. This time monetary tightening is taking hold fast as retail and MSME lending of banks is mostly benchmarked to the repo.
PC: ET Money
- As such, the Union and state governments have embarked on fiscal consolidation, which complements monetary policy. Mind you, it’s prudent to hold back in an uncertain situation. In the April-June quarter, GDP grew in double digits. But RBI has forecast that in the subsequent quarters till the end of the financial year growth will keep slowing down. Moreover, RBI’s analysis of inflation drivers showed that the April-September increase was mainly on account of supply shocks. Of course, a global recession will dampen demand. Therefore, it may be time for a slower pace of rate hikes even as RBI’s ongoing drive to drain liquidity will carry on monetary tightening. Brace up for more challenges in the coming days.
