Merry days ahead, RBI believes worse has passed. As the data released by Reserve Bank of India in July 2022 bulletin suggest inflation peaks. However, caution to be exercised as this prognosis may be premature.
In its July bulletin, the Reserve Bank of India stated that there are signs that inflation may be peaking but added that this prediction may be premature. Consumer price index (CPI) data show that inflation, which is currently over the MPC’s tolerance band, was 7.01 percent in June compared to 7.04 percent in May and 7.79 percent in April.
RBI in its bulletin says, Indian economy shows a strong resilience to global economic downturn caused due to wars and recession.
Things to keep an eye for
- Rupee currency weakening, reaches all-time low of 79.88/$.
India is a net importing country. Falling value of rupee is resulting in increased cost of imports. Especially, crude oil and coal being major source of energy is being imported (valued usually in US dollars). Thus, India is facing a cost push inflation since prices of energy and fuel is pass on to all the goods and services. If the rupee continues to fall and breaking all-time low limits, the cost would keep increasing and inflation may spike again.
Although the recent inflationary trends act as a light at the end of the long dark tunnel, we need to restrain the joy and look it this holistically to assess the economic situation better. Apart from the above RBI has taken many steps in this direction which includes announcement of bilateral payments mechanism and entering into bilateral FTA agreements. In addition to this government has eased foreign exchange regulatory policies such as FDI, ECB, NRI (deposit) and FCRR accounts.
- Surprise tightening of policies by central banks in Asia.
An unexpected tightening by peers in the area puts their currencies susceptible to sell-off, say to experts, and central banks in Asia that stayed dovish even in the face of surging inflation may find their commitment challenged.
For instance, Thailand kept its key rate at a record low to bolster the economy’s recovery, is seeing the baht emerge as this month’s worst performer as per Bloomberg who tracked performance of 12 Asian currencies. Determined US Policy makers who intends to further tighten the policy is creating a sense of urgency in many other Asian markets to further raise the key rates.
Singapore and Philippines both have tighten the monetary policies after release of US inflation data which has reached a 4-decade high.
These actions will put pressure not just on Thailand and Indonesia but also on nations like India whose policies are returning to pre-pandemic levels. This is because money managers seek higher returns amid negative real rates in Asia as the increasing borrowing costs in the US have a tendency to drain capital from developing countries.
- US inflation reaches to 9.1%, deep concerns of other major rate hikes by federal banks.
Last Friday, US realized its inflation data which has beaten the its inflation estimates. US has been very vocal of its strategy to beat inflation through hard techniques. US is trying to control the inflation only through raising the federal rates rampantly to induce a recession and control the economic growth. Amid such concerns, other country is force to take similar steps to preserve the forex (US $ reserves) the restrain the foreign cash outflows. Such harder method has devastating impact on the economic growth which is struggling to revive after the global pandemic.
Although the recent inflationary trends act as a light at the end of the long dark tunnel, we need to restrain the joy and look it this wholistically to assess the economic situation better. Apart from the above RBI has taken many steps in this direction which includes announcement of bilateral payments mechanism and entering into bilateral FTA agreements. In addition to this government has eased foreign exchange regulatory policies such as FDI, ECB, NRI (deposit) and FCRR accounts.
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1) RBI signage: https://www.livemint.com/Money/kYp4Gsg4fPR7pYQMHd7vlL/RBI-hikes-repo-rate-by-25-bps-to-65-raises-inflation-proj.html
2) Falling Rupee: https://shree1news.com/wp-content/uploads/2022/05/index4098.jpg
3) Rising Interest Rate: https://img.naidunia.com/naidunia/ndnimg/10062022/10_06_2022-interest_rate_hike.jpg