NRIs report price of gas in Bay Area spiking from around $1.3/gallon in March this year to current rate of around $6/gallon. The lingering conflict between Russia and Ukraine has thrown nagging challenges which accentuate the existing supply chain disruptions, causing food, energy and commodity prices being elevated, inflation to hit decadal highs and persistence of demand-supply imbalances. This globalisation of inflation makes it mandatory for the central banks across the globe to reorient and recaliberate their monetary policies. Emerging market economies are facing even bigger challenges from increased market turbulence, monetary policy shifts in advanced economies and their spillover effects, which slow the process of economic recovery in emerging economies like India as is seen by the GDP growth forecasts of World Bank, Moody’s Investors Service, S&P Global Ratings, Fitch, IMF, ADB and RBI.
The protracted conflict in Europe and the accompanying sanctions being increasingly imposed by the western world have kept global commodity prices elevated across the board, exerting sustained upward pressure on consumer price inflation, well beyond the targets in many economies. The ongoing conflict is also turning out to be a dampener for global trade and growth. The steps taken by the advanced economies are also leading to heightened volatility in global financial markets, causing corrections in major equity markets, sizeable swings in sovereign bond yields, US dollar appreciation, capital outflows from emerging markets like India. Globally, stagflation concerns are also growing, which also spurs volatility in global financial markets.
Navigating through difficult times makes it necessary to be sensitive to the new realities and incorporate them into thinking and actions. After much debate and discussions over all possible dimensions of macroeconomic situations and newer challenges being thrown upon by different geo-political and economic happenings globally, today the RBI took a unanimous decision to increase the policy repo rate by 50 basis points to 4.90% with immediate effect. Inflationary pressures going much beyond the upper tolerance level- a gradual, orderly and calibrated rise in repo rates, is something that the RBI is required to take account of, without losing sight of the growth requirements and disturbing macroeconomic stability. However, despite these challenging times, the Indian economy has remained resilient, ably supported by strong macroeconomic fundamentals and buffers. The recovery has gained momentum despite the pandemic and the conflict in Europe.
As the RBI is of the opinion that inflation is likely to remain above the upper tolerance band of 6% through the first three quarters of 2022-23. The reduction in excise duties on petrol and diesel will certainly help in mitigating the inflationary pressures to some extent, however further monetary policy measures appeared necessary to anchor the inflation expectations. According to the provisional estimates released by the NSO on May 31, 2022, India’s real GDP growth in 2021-22 is estimated at 8.7%. The level of real GDP in 2021-22 has exceeded the pre-pandemic (2019-20) level. The recovery in domestic economic activity also remains firm, with growth impulses getting increasingly broad-based. Manufacturing and services PMIs for May point towards further expansion of activity, corroborated by encouraging movements in railway freight and port traffic, domestic air traffic, GST collections, steel consumption, cement production and bank credit. While urban demand is recovering, rural demand is also gradually improving. The contact-intensive services related to trade, hotels and transport have also recovered substantially. Capacity utilisation in the manufacturing sector increased further to 74.5% in the fourth quarter of 2021-22, which is likely to increase further in 2022-23, which is sure to spur the investment activities. Government’s capex push, pick-up in bank credit, persisting growth in imports of capital goods, buoyancy in merchandise exports with double digit growth for the fifteenth successive month in May and high growth of non-oil and non-gold imports are the indications of a sustained recovery in the Indian economy. Hence, there appears no trouble even when RBI raises repo rates in a calibrated fashion.
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