Prudent home macro policy need of hour

In further disappointing news, the IMF confirmed that the medium-term global outlook appears more adverse than the previous ten years.

Published: 15th October 2022 12:35 AM  |   Last Updated: 15th October 2022 12:35 AM   |  A+A-

Recession, inflation

Image for representational purpose. ( Express Illustration)

The first half of the fiscal sees a mixed macroeconomic performance, and the outlook for the second doesn’t appear promising. Inflation is refusing to return to the barn, and industrial output is declining, yet India is expected to deliver a game of two halves. This, despite global headwinds exerting undue strain on the rupee, current account and trade, even as food and fuel prices and fiscal imbalances continue to weigh heavily on the country’s macro outlook. Disappointingly, the idea of India decoupling from the rest of the world may not bear out, as more than the domestic factors, it’s the external elements like global recession, rising energy prices, global inflation and interest rates, and strengthening dollar that is preying on the economy’s nerves.

The near term will test the extent of the rupee rout and the RBI’s defence through rates and forex reserves. If measures on the import side would impinge on domestic growth, opting for NRI bonds isn’t as attractive without raising short-term rates first. Given an incomplete domestic recovery, letting the rupee depreciate gradually could ensure exchange rate competitiveness and help avoid a sharp fiscal consolidation. The RBI must thus deploy a judicious mix of rupee depreciation and rate hikes, ensuring positive real rates and closing the interest rate differential with developed markets. Likewise, the potential slowdown tremors in exports too will be felt across emerging markets. India isn’t export-dependent, but since 45% of exports are driven by labour-intensive MSMEs, it could unleash a domino effect, starting with falling discretionary consumption to investments to production and, lastly, onto the financial sector.

ALSO READ: IMF chief urges aggressive fight against soaring inflation

In further disappointing news, the IMF confirmed that the medium-term global outlook appears more adverse than the previous ten years. If the last decade saw advanced economies struggle with low inflation, their troubles got way tougher this decade, marked by higher-than-acceptable inflation and interest rates. The Indian economic recovery is not only incomplete but also isn’t immune to the aftershocks of global slowdown, which transmit through trade, commodity prices, capital flows, and financial markets.

Even if India gains from a recession-led fall in commodity prices, higher energy prices driven by geopolitical uncertainties may negate those benefits. With the external environment turning increasingly adverse, a prudent domestic macro policy must entail balancing the exchange rate, taming inflation, managing real rates, and ensuring minimal macro-prudential risks from the twin deficits—all at once.


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