In this episode of Interpreting India, Radhika Pandey joins Suyash Rai to analyze why India and other major economies are experiencing high inflation, the measures that have been taken to control inflation, the expected impact of these measures on economic growth, and the future course of action.
In this episode of Interpreting India, Radhika Pandey joins Suyash Rai to analyze why India and other major economies are experiencing high inflation, the measures that have been taken to control inflation, the expected impact of these measures on economic growth, and the future course of action.
Episode Contributors
Radhika Pandey is a Senior Fellow at the National Institute of Public Finance and Policy and has twenty years of teaching and research experience in macroeconomics and financial policy. Her academic work focuses on macroeconomics, business cycles, financial policy, and regulation. She has been part of a number of Ministry of Finance instituted committees and writes regularly on contemporary economic issues.
Suyash Rai is a deputy director and fellow at Carnegie India. His research focuses on the political economy of economic reforms, and the performance of public institutions in India.
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Suyash Rai
Hello and welcome back to interpreting India! As the world looks to emerge from the shadow of the coronavirus pandemic, 2022 has been defined by precarious geopolitical relations, drastically shifting economic trends and rapidly evolving technological landscape.
Suyash Rai
This season we at Carnegie India are examining many of the challenges and opportunities that India will confront in the coming decade.
Suyash Rai
I'm your host Suresh Rai and this week we are diving deep into the present crisis of inflation across economies and record levels of inflation in India.
Suyash Rai
In this episode of Interpreting India, we analyze why India and other major economies are experiencing high inflation?
Suyash Rai
The measures that have been taken to control inflation, the expected impact of these measures on economic growth and other developmental indicators and the future course of action.
Suyash Rai
Joining us today for this discussion is Radhika Pandey
Suyash Rai
Radhika is a senior fellow at the National Institute of Public Finance Policy (NIPFP) and her policy and academic work focus on macroeconomics business cycles, financial policy, and regulation.
Suyash Rai
She's been a part of a number of Ministry of Finance instituted committees and writes regularly on contemporary economic issues.
Suyash Rai
Hello Radhika! Welcome to Interpreting India.
Radhika
Thank you Suyash. Thank you for having me.
Suyash Rai
So perhaps we could begin by taking stock of the global picture
Suyash Rai
What is the inflationary landscape right now and as people have been writing that in the advanced developed economies, inflation has been at the highest in more than 3 decades and even in the emerging and developing economies it's been the highest in more than a decade?
Suyash Rai
So, if you can just help us understand what the current global inflation landscape looks like globally, and I mean where, how did we come here?
Suyash Rai
What are the main drivers of this situation that we are in?
Radhika
Sure, so the obvious driver has been the Russia-Ukraine war, but if we just step back a bit and we look at the pandemic time, the inflationary pressure started building up during that time.
Radhika
So, during the pandemic, we had these supply-side disruptions and even before that for some items, like for some of the items which are used in the automobile sector, the chips we were seeing some kind of shortages there and some kind of supply-side disruptions and input cost pressures were building in some sectors
Radhika
and then the war aggravated. So, during the pandemic,
Radhika
we had supply-side disruption and then the war further aggravated the supply-side disruptions which resulted in the spike in prices
Radhika
What is equally important to note is that you know the nature of inflation
Radhika
An advanced economy is a mix of both the demand-side and supply-side.
Radhika
You know, because when we see what kind of policy response was initiated by the governments in advanced economies, they initiated urgent fiscal packages
Radhika
They gave money, water, and standard helicopter money.
Radhika
They gave money in the hands of people to you know mitigate the pain of the pandemic.
Radhika
So, at that time when the supply side was weak, the supply side was tight.
Radhika
At that time, when demand was increased, we saw more, you know, the aggravation of inflationary pressures.
Radhika
And we saw a pent-up demand taking shape when the economy started opening up.
Radhika
So, when we saw some slide in the COVID cases while supply-side disruptions take
the demand pressure started rising and that resulted in increase in prices.
Radhika
So that was the condition during the pandemic, which was further accentuated by the war, which further you know created supply-side tightness, particularly in commodities like crude oil metals, fertilizers and so on, so that's the point on key drivers and if we talk about the inflationary landscape.
Radhika
As you rightly pointed out, in economies like US and UK, inflation has touched to record highs inflation algorithm to 8.6% when the target is around 2%
Radhika
The inflation target is 2%, so inflation has been rising and you know it's now become entrenched,
Radhika
It started with a few items.
Radhika
It started then you know interestingly started with a thing like used cards and now it has become more broad based.
Radhika
It is now not only limited to goods, it's spilled over to services and therefore we see you know, aggressive policy rate hikes by the central banks.
Suyash Rai
Right! Now coming to India, you said that the target inflation rate in most of the developed countries is a 2%. Our targeted is 4% with a tolerance band of two to 6%, right?
Suyash Rai
And now, for about five months, the inflation has been higher than 6%. And I mean, even though there was a slight moderation from April to May, there was a slight decline, but still, it was about 7% in May as well.
Suyash Rai
So the situation is still of high inflation.
Suyash Rai
I would say what are some of the reasons that are India specific for inflation India?
Suyash Rai
And also what extent do you think the inflation is being imported because there's a global inflationary kind of pressure building up in India.
Suyash Rai
It cannot remain unpatched from that
Suyash Rai
So how? What are the factors of the India-specific and water global factors driving inflation in India?
Radhika
So again, going back to the pandemic time, you know now we see inflation rising above 6%, but even from the second half of 2021 we saw inflation rising and inflation was inching up towards 6%, and during that time it was primarily due to the pandemic and due to the pandemic induced disruption, the supply side shortages primarily.
Radhika
Now what is happening is that, again, due to what if there are supply side disruptions but at the same time because the COVID cases have receded and economy’s opening up, so we are seeing a revival in demand.
Radhika
In some indicator we can see that you know the to some indicators. We can see that demand is reviving,
Radhika
so while again, the same kind of policy picture where demand has started to pick up, whereas supply side disruptions still persist.
Radhika
So that is the reason for inflation, but there are again the bulk of the inflation problem is due to external headwinds, but there are domestic factors as well.
Radhika
There are these extreme weather conditions that have resulted in increasing prices of cereals, particularly wheat.
Radhika
We saw shortage in the wheat production.
Radhika
Whatever was estimated projected in the advance estimates we did not reach that target.
Radhika
As a result, India had to announce export ban on wheat because of this reason and even to improve the supply of wheat.
Radhika
So while primarily it has been driven by international factors, but now what's happening, it started with international factors, but now due to demand also picking up, we are seeing that the inflation has become more broad-based
Radhika
We are seeing not only in goods but also in services.
Radhika
Inflation is picking up because you know in sectors the contact intensive sectors which were earlier showing a muted growth are not now showing revival, so people are increasing demand
Radhika
People are stepping out, so we are seeing increase in demand there.
Radhika
So supply side disruptions coupled with revival of demand alongside extreme weather conditions, these are some of the factors that have contributed to now a broad based inflation in India.
Suyash Rai
Now, obviously the policymakers have to respond to the situation, and they are taking steps. So now, April 8th RBI's Monetary Policy Committee decided to keep the repo rate unchanged. But on May 4th they decided to raise the rate by about 40 basis points to 4.4% and then again on 8 June, they decided to raise the rate to 4.9%.
Suyash Rai
The CR was also raised by about 50 basis points, to about 4.5%.
Suyash Rai
So do you think the RBI has acted in a timely manner and is this response adequate? So there are two parts to this question whether we should have acted earlier on hindsight, of course, and whether this particular response is adequate for the kind of situation that we're in?
Radhika
So coming to the first question, which is on whether this could have been done earlier or not, whatever aggressive, now policy tightening that we are seeing?
Radhika
So to that question, I would say that you know the defacto tightening of monetary policy started from the second half of 2021, where we saw Reserve Bank doing more of you know absorption of liquidity. While we did not see interest rate hike. But de facto policy tightening started in from the end of, alongside towards the end of last year, calendar year last year where they started doing more of what external variable rate reverse slip auctions.
Radhika
Which are used to withdraw liquidity so that is one thing that is 1 manifestation of a reversal of further ultra-accommodative monetary policies.
Radhika
The other part is that they did not extend what is termed as the G-SAP. The government securities acquisition program.
Radhika
Where they were buying government bonds and infusing liquidity so that was another instrument of accommodative monetary policy which they discontinued.
Radhika
So, they gradually did start with policy tightening.
Radhika
But the real change happened from the April policy, and if you look at their guidance, the monetary policy statement that is announced alongside their resolution, it’s said that there for the first time they mentioned withdrawal of accommodation till then the priority was on growth, but the from April, they started talking about the withdrawal of accommodation and then in May they came up with this surprise policy hike.
Radhika
At the same time, when the US Fed had to hike the interest rate, so we are seeing that the Reserve Bank is responding.
Radhika
But again, the situation has been so uncertain, so I think it will be unfair to say that Reserve Bank was behind the curve, because at that time the priorities and the heavy lifting on for supporting growth was done by Reserve Bank of India.
Radhika
The government policy response was you know, again, supply side oriented and again focused on Credit, which was the mandate of the Reserve Bank so Reserve Bank did much of the task of you know, supporting growth and mitigating the distress caused by the pandemic.
Radhika
And we do see some of the positive impact of that, and from October onwards they did start with the draw of accommodation and again here it's important to understand that the nature of inflation in advanced economies and India was different, primarily because of the policy response that advanced economies government primarily the US adopted and what India adopted.
Radhika
We did not have a fiscal package, kind of a support which the US did and therefore their inflation was more of demand led, which could be addressed by interest rate hikes at that time.
Radhika
So they started giving this communication that you know now we are going to start raising rates.
Radhika
They started, you know, changing their guidance they started giving forward guidance on the fact that now the time to you know shift focus from growth to inflation, whereas India continued to focus RBI continued to focus on growth till say January February their focus was on growth and then from April onwards it shifted.
Radhika
While some kind of defacto withdrawals started happening from October itself, so I think it was a fair assessment because nobody could have anticipated the war and the steep supply side tightness that have arisen due to the war so I think during that time, and given the conditions, I think it's unfair to say that RBI fell behind the curve.
Radhika
Now what it’s doing is raising the rate and that is the only blunt policy instrument in the hands of the Reserve Bank to address inflation.
Radhika
Which it is doing and based on the trajectory of how inflation moves, they have themselves. Given this projection that you know till the end of this year inflation would not be below 6%.
Radhika
So, to control that they would have to raise rates and raise rates in such a way that at least the real rate turns marginally positive to give some kind of incentive to savers
Radhika
Otherwise, if we have, if we keep having negative real returns, then whatever you know that the deposit mobilization will not happen and whatever credit growth we are seeing that will not be sustainable, that will not be supported.
Radhika
So now the role of monetary policy at this point of time is to effectively anchor inflationary expectations in a way that to come up with rate hikes in a way that you know the real rate turns at least marginally positive.
Suyash Rai
We made a comment on fiscal policy as well, so I want to go down that tangent a little bit before we come back to this, I remember that back in 2020 there was a big chorus to demanding fiscal support and you know, basically increasing deficit even further beyond what could be increased to be able to support demand in the economy.
Suyash Rai
Now if I'm reading you right, you seem to be saying that. If we had done that, if the government had done that, it today would have been a much more difficult situation,
Suyash Rai
not just fiscally, but also in terms of inflation, which seems to be the major driver in the developed countries.
Suyash Rai
So now obviously we have because of not embarking upon that kind of a strategy, we have saved a little bit of fiscal space and what can the government do so RBI is doing what it is doing in the monetary policy, their actions, but what can the government do to help in this inflation fight?
Suyash Rai
So if to be able to stem it. Basically because if you look at compared to India's inflation to the inflation in developed countries we are not doing too badly because our I mean tolerance band is also very different from their tolerance band,
Suyash Rai
so we're not way above that while they are in a very different zone, especially in countries like the US, becoming a different zone.
Suyash Rai
But we need to be careful and we need to ensure that it doesn't get out of hands, Is there anything that fiscal policy can do in this regard?
Radhika
So government has already taken some steps on fiscal front, like we saw that excise duty cuts were announced on petrol and diesel and on subsidies on fertilizers.
Radhika
The subsidies was enhanced from what was given in the Budget so again, you know from fiscal side the government can continue to do these things.
Radhika
It has been doing like on edible oils
Radhika
It had slashed the import duties at the time when Indonesia had banned the import of farm oil. And so on
so on.
Radhika
Edible oils on subsidies on crude oil.
Radhika
They have reduced duty and increased subsidy and increased subsidy, but again there is there is a tradeoff.
Radhika
You know how much duty cuts can be made, because if your fiscal deficit gets too much deviated from what you had targeted and then you are going to borrow more.
Radhika
That will lead to increase in interest rate, and it has its own set of implication which are very adverse for the revival of an economy like India.
Radhika
Because if your interest rates start rising, then again, the four would be more adversely affected because investments will not happen job creation will not happen.
Radhika
So that kind of a balancing act between you know, acting to the tame inflation to, you know, take steps from the fiscal front.
Radhika
So these are the steps you know.
Radhika
The steps that the duty cuts and increasing subsidies to cushion the impact of the global surge in prices.
Radhika
But again, there are complex tradeoffs that every government faces as to how much duty cuts to give so that fiscal deficit does not deviate too much from the target because it then has an impact on private investment it leads to crowding out of private investment.
Suyash Rai
Private investments, right!
Suyash Rai
Now coming back to the so inflation and monetary policy action against inflation.
Suyash Rai
obviously the rate hike is quite recent a couple of months back. It happened,
it happened again a month ago.
Suyash Rai
So what are some of the early signs you've seen in terms of transmission of monetary policy?
Suyash Rai
Is it already happening or is there?
Suyash Rai
Usually what is said in India is that there is a big lag.
Suyash Rai
And in between monetary policy decisions and there actual I mean transmission into the economy.
Suyash Rai
So what are the signs that you've seen?
Suyash Rai
As of now so one side is that you know the interest rates have started to rise.
Radhika
So one side is that you know the interest rates have started to rise. You know the lending rates if you look at the monetary policy transmission towards the lending rates that have been very fast.
Radhika
Because now most of the banks follow an external benchmark to price their loan.
Radhika
So that has been that has already started happening.
Radhika
While on the deposit side, also some of the banks have raised their interest rates, but not to that level, and that is understandable because deposit rates are sticky.
Radhika
But we should see going forward some heightened deposit rates so so that is one element of transmission that we are seeing that you know interest rate hikes leading to Increase in lending rate.
Radhika
What we also need to see going forward is you know the Reserve Bank of India inflation expectation survey that are released
Radhika
So how will they be impacted?
Radhika
Because the lending rate and deposit is one element.
Radhika
But what is important to see is that.Whether due to these rate hikes, the inflation expectation by getting anchored or not, the one-year, three-year near-term inflation expectations are getting anchored or not, so that will be the real test and the real challenge
Radhika
and I think for that purpose it is needed to have more certainty and predictability and better communication and forward guiding that you know we will continue to,
to raise rates till inflation is brought under control so that inflationary expectations are anchored.
Radhika
Otherwise, there will be a kind of a wage price spiral.
Radhika
Because then consumer, because inflationary expectations are backward looking.
Radhika
They will demand higher wages
Radhika
Companies will also start, you know, curbing their investment plans thinking that inflation is unanchored so it will have all sorts of adverse implications on the economy.
Radhika
So, what we need to see is that going forward, what happens to inflation expectations because once those are there we see signs of moderation.
Radhika
we should see the improvement and one of our recent worksthat we did on inflation targeting.
Radhika
You know the efficacy of inflation targeting over the last five years.
Radhika
It was a study conducted last year where we did see that you know, post the introduction of the inflation targeting regime, the inflation expectations were better anchored, so if that is the case, if that continues, we should see a moderation in inflation.
Radhika
.But again if the global headwinds continue to, you know remain elevated, inflation remains elevated.
Radhika
The task of Reserve Bank will become complex because then there are growth implications also as what we are seeing in the US, there's a talk of recession gaining salience.
Suyash Rai
Right!
Suyash Rai
Now I want to move a little bit towards the global scenario back again and we are seeing that much of the developed world, especially US, Europe.
Suyash Rai
They are waging a war against inflations, they're taking serious actions, and these are economies with which our economy is also integrated in many ways investment, flows trade flows are quite significant and other connections as well.
Suyash Rai
So what the two part question one is what do you? How do you? How would you describe the overall anti-inflation strategy for in these countries?
Suyash Rai
And how do you see that affecting Indian economy and what are the pathways that go through? Which it can affect in any economic Performance in the coming years or so?
Radhika
So so as we discussed the, you know, the main strategy which the advanced economies have been adopting is the rate hikes.
Radhika
And since the US has been pursuing aggressive rate hike, they've started with a 25-basis hike when they did 50 basis hike when they did a 75 basis hike. So, what we are seeing is that the yields on the US denominated bond is rising.
Radhika
Now whenever if we want to study the trajectory of foreign investor’s movement, you know whether there will be an inflow towards India or other emerging companies, or outflows are very important variables to look at.
Radhika
Is there what is the differential between what an Indian bond is offering and what the US bond is offering?
Radhika
Offers similar maturities.
Radhika
So, what a 10 year Indian Bond is offering and what a 10 year US bond is offering.
Radhika
If that difference is wide.
Radhika
If the Indian bond is offering much higher return than a US bond, then there will be inflows into India into emerging economy and that is what we were seeing during the pandemic time because the advanced economies had a very ultra accomodative policy, they were infusion liquidity.
Radhika
They were expanding their balance sheets, so we were seeing the differential between Indian bond return ambiguous bond return widening, and which led to greater inflows into India.
Now the reverse of that phenomenon is happening.
Radhika
What we are seeing is that while the Indian bond yields are also rising because of inflation concern but the US bond deal the pace of increase in the US bond deal is much more than the Indian bond deal
Radhika
And therefore the differential is narrow and when the differential narrows, given that US is a safe haven currency it has the status of Reserve International reserve.
Radhika
Therefore, we see an outflow from India and other emerging economies to back to the US. So due to the aggressive rate hikes which the advanced economies have been following.
Radhika
We are also seeing you know outflows, a consistent outflow since the beginning of this year, we have seen more than 2,00,000 crores of outflows already happening.
Radhika
And this is still continuing, so that is 1 implication.
Radhika
The other implication of this on the Indian market is that because the situation is highly uncertain.
Radhika
The risk appetite of investors has reduced considerably, and again there is a, you know, tendency to keep focused only on safe haven assets and therefore again the demand for dollar denominated assets size increase and that is what. Again we are seeing that the dollar index.
Radhika
Which is, you know the exchange rate of dollar with respect to a basket of currencies.
Radhika
It has hardened.
Radhika
It has strengthened so again we are seeing an outflow from India to these economies.
Radhika
So one of the implication of The US Fed following an aggressive monetary policy, is consistent outflows from India. Now. While that is a problem, is that because you know traditionally, we have a current account deficit because we are an oil importer country, we have a current account deficit.
Radhika
But the. Good thing is that normally we have a surplus on the capital account.
Radhika
So much of the deficit in the current account that we see which the deficit is due to you know trade in goods and services.
Radhika
Because our reports are more than exports, that deficit is somewhere bridged by the inflows of foreign investments.
Radhika
Now that part is also not helping because our current account deficit is widening, but on the capital account also we are seeing an outflow.
Radhika
So, because of this, the current account deficit is becoming a more serious problem.
Radhika
So, these are the two you know implications and because of the current account deficit becoming a serious problem, we are seeing, uh, no depreciation of the rupee.
Radhika
Because we are an oil importing country, our current account is highly vulnerable and at the same time we are seeing a sustained outflows of capital from our country.
Radhika
So as a result, we are seeing a consistent, repeat depreciation and that is not just a phenomenon for India.
Radhika
It's a phenomenon for all countries, which are commodity importers.
Radhika
All countries which are dependent on imports of oil or energy or fertilizers. We are seeing this kind of a phenomenon.
Suyash Rai
Right! Now, also because the effect of many of these anti-inflation app policy actions is basically to depress the demand in these countries. Do you think that there could also be a pathway through trade?
Radhika
Yes.
Suyash Rai
Because we do export big to these countries, especially our services export but also, goods exports go to many of these countries.
Radhika
Correct.
Suyash Rai
So I mean that we also may be affecting our current account except through trade deficit route as well. But what? What is your kind of view on this?
Radhika
Yeah, so we spoke about inflation affecting the, you know, global inflation and policy response in towards inflation.
Radhika
How it is affecting Indian economy?
Radhika
Now, because of this aggressive rate hikes in the US. Now people are talking about growth getting depressed and therefore some kind of recession happening in the US economy and even in the EU region
Radhika
So, because the US GDP has already contracted in one quarter in Jan-March quarter. And if it is there as we see another quarter of contraction, then technically US will be in recession because the technical definition of recession or a textbook definition of a recession is 2 consecutive quarters of GDP contraction.
Radhika
So that way we are seeing, and we know there are. Certain indicators based on previous episodes of recession that can assess whether no U.S. economy is headed towards recession and one of those indicators is the the yield curve inversion. So what we are seeing in the US is that the two year yield has risen much more than the 10 year yield.
Radhika
Normally what happens is your yield curve is steeper.
Radhika
You know, if your two-year bond will offer you lesser as compared to 10 year because you are packing your fun.
Radhika
You know 10 year bond for a greater period than for a two year bond, but if the reverse is happening where the two year bond is offering a higher than a 10 year bond return.
Radhika
Then it is a sign of recession and whenever in the US, we have seen this kind of yield curve reversal happening or you know inversion of yield curve. We saw recession, so it's a kind of a leading indicator for recession in the US.
Radhika
So due to some due to these reasons, we can infer that there could be some elements of recession or maybe a mild recession in the US in the in this year.
Radhika
Now, if that happens, as you rightly pointed out, Indian economy is integrated. You know, we may say that you know we have capital controls and we have these restrictions.
Radhika
So but de facto India is integrated with the global economy and we are seeing those headwind so that will have an impact on our trade and investment flows further,
Radhika
because you know last year, we did record $400 billion of exports target and going forward our exports will suffer if there is a recession not only in the US but in the global economy as well. So that is one reason that is one channel through which this session will have an impact on the Indian economy and that can lead to recession in India as well.
Radhika
Because you know the other drivers of demand, so we consider consumption investment exports.
Radhika
So, if exports is doing well, you know the economy can be supported at a time when consumption and investment is still picking up, or, you know, still is not reached a sustainable level.
Radhika
It's still so in that scenario if our exports also go down, then there will be weakening tendencies in the economy as well.
Radhika
And that is what we are seeing in some of the World Bank documents that are coming out now as compared to what came out in January or March. They have all downgraded their growth projections not only for the global economy or for US,
Radhika
but for India as well those our growth is still more than the other economies, but there has been a downward revision, so these are all implications of stagflation or a recession kind of a situation in the global scenario.
Suyash Rai
Right!
Suyash Rai
So I mean, since I'm talking to you, I should bring up the impossible trinity, and so any macroeconomics there is this impossibility that you choose two out of three.
Suyash Rai
Whether you can have free capital flow, fixed exchange rate independent or sovereign monetary policy, so as of now. RBI seems to be allowing the rupee to depreciate gradually, right?
Suyash Rai
It is. It's just happening. On arrival of basis Yes, but in the past, we've seen that RBI is quite sensitive to the rupee evaluation and there is a they do intervene to try to keep it within a certain range that they may have in their mind is not clearly publicly stated what they're comfortable with.
Suyash Rai
It's something that they do.
Suyash Rai
So how do you see the macroeconomic management that? RBI does basically and in some of the policy instruments.
Suyash Rai
Government also has a say changing in the next few months to a year under the current situation where there's a steady rupee depreciation.
Suyash Rai
And as of now, high inflation, not just in India also globally and capital outflows and overall happening.
Suyash Rai
There are some short periods in which they've been net inflow as well, but overall, these outflow happening.
Suyash Rai
Is there any? I mean big shift rules you are seeing in terms you would see in terms of the overall macro Management in the next few months or so.
Radhika
So, as you rightly said, you know RBI has been juggling 3 objectives.
Radhika
Now RBI is doing exchange rate management and inflation management and the third objective is that it is the debt manager to the government borrowing.
Radhika
So it is kind of juggling between these three objectives and now it's becoming increasingly complicated for RBI to focus on any one objective.
Radhika
So while legally You know RBI is supposed to be inflation targeter, but time and again it intervened in the foreign exchange market to arrest the rupee slide it has.
been doing that.
Radhika
It's not that it is not intervening.
Radhika
We can see that in the foreign exchange reserves. Foreign exchange reserves have plummeted below 600 Billion dollars.
Radhika
Primarily because of the fact that Reserve Bank has been intervening in the spot market.
Radhika It has also been intervening in the forwards market also to arrest the rupee slide, but I think. There is a limit to how much the Reserve Bank can intervene because they keep that they talk about their Forex Reserves.
Radhika
Being in comfortable position, they are able to cover these X months of imports and so on.
Radhika
So if they continue to intervene by, you know buying rupees and selling dollars.
Radhika
That argument they will not be able to make, so beyond the point they will, there will be some limit to how much they can intervene.
Radhika
But they have now employed the other method so they have the one way of arresting rupee slide is through intervention exchange rate management.
Radhika
They are also now doing exchange rate management through capital controls.
Radhika
So as you see yesterday, the Reserve Bank came up with these measures to augment the flow of foreign exchange into the country, so that is also one instrument, one lever that they have to, you know, encourage the inflows of capital.
Radhika
So they have liberalized external commercial borrowing.
Radhika
They have liberalized some limits of foreign investment in government debt and corporate bond.
Radhika
So these are all the things they're doing to arrest the rupee’s life and to to reign in the current account deficit.
Radhika
But what again, needs to be seen is whether these steps.
Radhika
While they are in the right direction, but whether these would be effective to prevent the rupee from sliding further.
Radhika
It needs to be seen because while if they would have been taken in normal times, the impact would have been different but at a time when there are more push factors, you know we are causing the dollar to flow out at a time when dollar bond yields are rising, people would prefer investments in dollar denominated assets.
Radhika
So, while these measures would help in boosting sentiment, their impact in the medium term would be seen, but in the immediate term it won't be too effective
Radhika
So, what we are seeing is that the Reserve Bank of India is managing exchange rate.
Radhika
Also, it's trying to manage inflation also and at the same time.
Radhika
It is also trying to manage their government borrowing side by side. It keeps you know coming up with some measures to incentivize banks to invest in government bonds
Radhika
So it is. It's becoming increasingly complicated because at a time when the interest rates are rising, interest rate on government programs will also rise.
Radhika
So the reserve banks will have to make a call between whether they want to keep interest rates low to support government borrowing or to increase interest rates to manage inflation.
Radhika
No, that is why we have always been talking about having an independent debt management office.
Radhika
And to, you know, take away this responsibility of debt management from RBI, because in situations like this the complication becomes, you know, we can see that tradeoff very clearly.
Suyash Rai
Yeah, and also I mean there is no pressure to ease capital controls also.
Suyash Rai
We have to consider it as one of the instruments to ease our pressure on the bank
bank as well.
Suyash Rai
Remember these kinds of situations such distance can be taken.
Suyash Rai
Perhaps that will not be taken otherwise.
Suyash Rai
This kind of ending on a crystal gazing kind of note said again, two parts.
Suyash Rai
One is it, how do you see what is your kind of the different scenarios one can paint.
Suyash Rai
But what is your scenario for specially inflation in India?
Suyash Rai
Because there this is I mean they've been monetary policy actions taken.
Suyash Rai
There are some fiscal decisions taken
Suyash Rai
There will be more taken, but I mean. Going forward, say six months or now.
Suyash Rai
Do you see inflation coming within the tolerance band in India?
Suyash Rai
And similar, and similarly in the global scale.
Suyash Rai
Do you see this as a I mean going by understanding of economic history and how these episodes play out the war we, you know, and at some point, or at least will become less of a factor or fully overtime.
Suyash Rai
Other factors may also change, but do you see this as going beyond full say December 2022 or is this something which is which is likely to last longer?
Suyash Rai
What is your scenario?
Radhika
So scenario on inflation is that you know it will remain elevated and talking about CPI inflation.
Radhika
In India it will, It is likely to remain elevated till the end of the year,
Radhika
because even if the war is to end tomorrow was to end tomorrow, there will be some time.
Radhika
For stabilization to take place for supply chains to repair and so on.
Radhika
So inflation is likely to remain elevated, then even going by RBI projection, it's not going to be, you know.
Radhika
Reduced till the end of the year.
Radhika
It will take at least there till the end of the year to come to the inflation band of 6%.
Radhika
But my viewpoint is that it will linger on beyond that point. Inflation will remain a problem, not just because of domestic factors.
Radhika
But because of global headwinds and the fact that now inflation has become more broad based, it has become entrenched. It has shifted 2 services also.
Radhika
So it's not just one or two factors driving inflation, it's a broad-based thing, and even if the global factors start to, you know, moderate like we are seeing metal prices moderating.
Radhika
If we look at the aluminum prices for prices they have fallen from their height.
Radhika
Even if we look at crude oil, it has started to retreat,
Radhika
but these factors. Will take some time so I think towards the first half of the calendar year of next year we should see some moderation in inflation.
Radhika
But what we also need to worry about at the same time is the what will happen to growth,
Radhika
how the growth will pan out in the coming few quarters.
Radhika
Because if there is high and sustained inflation, it impacts growth. It impacts consumption it affects the discretionary consumption employment and so on. So those things are also to be seen
Radhika
What we are seeing in other countries about, you know the combination of high inflation and weak growth.
Radhika
How much of that spills over to India that is also will become more clear over the next couple of months
Suyash Rai
If you are on the MPC. Would you recommend? Any other hike in the next MPC meeting?
Radhika
Yes, definitely
Radhika
Another at least two to three hikes more so that we have a real interest rate turning at least positive or right now the policy repo rate is 4.9 and inflation is 7%. If we go by the last month print though to some extent it was driven by base effect.
Radhika
And we should actually see some more month’s inflations to see to make a statement on whether inflation has started moderating it has peaked or not
Radhika
So we should see two to three more rounds of repo rate hikes.
Radhika
the quantum can you know vary it may well be that they front load more rate hikes in the first two meeting, and then they start full paper off. So that is one thing that needs to be seen, but there would be at least two cycles of rate hikes.
Suyash Rai
Thank you, thank you,
Suyash Rai
This was very informative and a lot of wisdom of many years of thinking and working on macroeconomic issues.
Suyash Rai
I think within issues of macroeconomics it takes a lot of time to develop good judgment because you have to see many cycles play out
Suyash Rai
And then you develop a sense of judgment. Then I think you you've been added for such a long time that you have that intuition now and then you.
Suyash Rai
Very thankful that you could join us today.
Suyash Rai
Thank you.
Radhika
Thank you Suyash it was a very insightful discussion.
Suyash Rai
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Suyash Rai
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Suyash Rai
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Suyash Rai
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