The oppressive winter that has descended on Delhi is a sign and should not be dismissed as just another weather phenomenon. Threats from global economic weather systems are casting a dangerous shadow over the Indian economy. The nascent rumble has registered a 2.3% fall in the BSE Sensex since its closing on October 18. Foreign portfolio investors have become net equity sellers this financial year, but net debt buyers. This should tell us something. A major undeniable risk rattling the collective backbone is the US Federal Reserve’s decision to reduce its monthly $120 billion bond purchase program by $15 billion each month, which begins “later this month”. Ongoing liquidity ever since Covid hit will not only adversely affect asset prices everywhere but could also push Indian markets on a volatile path. While the 2013 redux is unlikely, given the comfortable level of our forex reserves, exactly how the risk will play out is unclear. It shows uncertainty. The changing relationship between money, output and prices—along with 50 years of economic conservatism—will require the Reserve Bank of India (RBI) to develop and closely monitor a resilient dashboard.
However, what is not visible on the horizon is not everything. Inflationary pressures have arisen globally. Initially rated as only transient, inflation has refused to go away. Prices are consolidating for two main reasons. As economies open up, supply chains disrupted by the pandemic are struggling to keep up with rising demand. Higher transportation costs are feeding into retail prices. A related consequence is our shortage of semiconductor chips, which has affected sales of a wide variety of products from cars to consumer durables, and may even delay the country’s digitization. Another source of inflation is rising energy prices with OPEC-plus (which includes Russia) increasing oil production, even as a jarring climate-driven transition to clean fuels destabilizes. creates space. US President Joe Biden’s statement on inflation (“reversing this trend is a top priority for me”) suggests that achieving price stability may be more diabolical than anticipated. In addition to importing such price impulses, we may find that our taxation structure makes it difficult to maintain domestic inflation expectations, regardless of recent fuel-levy cuts.
If sustained inflation in the US prompts the US Fed to cut sharply and hike rates sooner than mid-2222, we may be faced with the time by which it is currently holding its special bonds. The purchase is scheduled to expire. The three-point risk vector of easing, global inflationary impulses and high interest rates in developed economies could potentially wreak havoc with India’s economic revival plans. There could be additional shuddering from China, should Beijing allow its big builder Evergrande to sink into debt, which will hit the credit markets around and have unforeseen effects. Project finance, especially for infrastructure, can be slow. Climate action could also blow headwinds. Widely envisaged is a market for carbon permits that would require putting a price on carbon emissions. Discussions on the global order are still at an early stage, but may accelerate. Whatever the framework of the final mechanism, polluters who have to pay for their carbon dioxide exhaust are likely to pass this additional cost on to customers. This will have its own price effect. Both the RBI and the government have to exercise due caution on these myriad risks.
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