Further rate hike by RBI imminent, will impact growth further

RBI’s Monetary Policy Committee (MPC) is scheduled to meet for three days starting from tomorrow (28th September). For us, the common man, the outcome is important on two counts: What will be the interest rates and what will be the updated GDP projection.

It is known that interest rate is likely to go up further, as the RBI is mandated to keep inflation between 2-6 percent, in which it has failed in recent times. The question is whether containing inflation by hiking interest rates will lead to recession as indicated by the World Bank, and whether India will be able to score 7% growth in the current financial year.

The global economy has slowed down this year, while the world is going through one of the harshest monetary and fiscal policy tightening of the past five decades. The governments and central bank officials around the world including India are trying to contain inflation by hiking interest rates, generating fear of recession.

If the world slips into recession, it will be almost impossible for India to avoid the trap. With the union government staying indifferent towards the demand side, internal demand is continuing to be low for the last few years, and now the international demand is likely to be affected. In such a situation, the investors’ appetite for risk by producing more will naturally be low.

Look at the global scenario. According to reports, the market capitalization of the US companies in the Global Top 100 has grown at a CAGR (compound annual growth rate) of 18 percent in the last five years. But their experts feel the future ahead being bleak for the economy will affect the growth of those companies.

Though the US recovered fast after the pandemic hard times, now GDP growth has fallen for consecutive two quarters, and the trend is likely to continue for some time. The Fed Chief had made it quite apparent earlier in Jackson Hole that the Fed has no plans to halt its cycle of rate increases. He rather warned of more pain, both for individuals and businesses, because of rate hikes.

Our very own RBI is, by law, required to prioritise maintaining price stability. It is behind the curve of 2-6% inflation, and so far for the whole of the current year inflation is raging above the 6% mark. The union and state governments earlier exploited the oil situation by extracting abnormally high revenue, thus pushing the inflation beyond the threshold. The RBI grasped the reality too late, and the damage was done.

And now, even by RBI’s projections, retail inflation above 6% may spill over to the next calendar year, and is likely to be 6.7% for the financial year ending in March 2023. To fight the situation the RBI is hiking interest rates to absorb liquidity, though it is very highly doubtful whether investors’ demand for more money induced this high rate of inflation.

But with the US Fed rate hike continuing, the RBI has almost no room for walking a different path, as the Fed rate is heavily impacting the emerging market economies such as India. When the US has low interest rates, global investors borrow money at very low interest rates, and invest it in India and other emerging economies. But the situation reverses when the Fed hikes interest rates, and money is pulled out of emerging economies. To stay afloat in this situation, the RBI has to raise interest rate so that India remains a lucrative destination.

Thus, it is a trap that India has to step in. The added woe comes from rupees value vis-à-vis the dollar falling constantly. However, it is not only rupee, but almost all the currencies of the world that are taking the beating. The pound too is now at its lowest vis-à-vis the dollar in recent times. A weaker rupee means higher imported inflation as all imports will be costlier, including crude oil.

The overall impact will be the dampening of the spirit of the investors, which will by turn lead to lower GDP growth rate. When RBI projected a GDP growth forecast of 7.2% for 2022-23 in April, it had no clue about the inflation situation which it pegged at 4.5% for the whole year. As the inflation forecast has been altered since, and has gone up to 6.7%, it is common sense that the growth will come down.

It is not known whether the RBI will alter the growth projection, but in reality India will be lucky if it manages to end the financial year scoring an overall growth rate of 7% – IANS

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