Domestic Bonds

Cautious macroeconomic policy at home needs an hour – The New Indian Express

The first half of the fiscal year sees a mixed macroeconomic performance, and the outlook for the second does not look promising. Inflation refuses to go back to the barn and industrial production is down, but India should play a game in two stages. This is despite global headwinds putting undue pressure on the rupee, current account and trade, even as food and fuel prices and fiscal imbalances continue to weigh heavily on the country’s macroeconomic outlook. Unfortunately, the idea of ​​decoupling India from the rest of the world may not be confirmed, because more than domestic factors, it is external elements such as global recession, rising energy prices , inflation and global interest rates and the strengthening of the dollar which attack the nerves of the economy.

The short term will test the extent of the Rupee rout and the RBI’s defense through rates and FX reserves. If measures on the import side are impinging on domestic growth, opting for NRI bonds is not as attractive without raising short-term rates first. Given an incomplete domestic recovery, allowing the rupee to depreciate gradually could keep the exchange rate competitive and help avoid abrupt fiscal consolidation. The RBI must therefore deploy a judicious combination of rupee depreciation and rate hikes, ensuring positive real rates and reducing the interest rate differential with developed markets. Similarly, the potential jolts from slowing exports will also be felt in emerging markets. India is not dependent on exports, but as 45% of exports are driven by labour-intensive MSMEs, this could trigger a domino effect, starting with falling consumer discretionary up to investments in production and, finally, on the financial sector.

ALSO READ: IMF chief calls for aggressive fight against soaring inflation

In other disappointing news, the IMF confirmed that the global medium-term outlook looked worse than in the previous ten years. While the past decade has seen advanced economies struggle with low inflation, their problems have worsened considerably this decade, marked by higher-than-acceptable inflation and interest rates. India’s economic recovery is not only incomplete, but also not immune to the repercussions of the global slowdown, which are transmitted through trade, commodity prices, capital flows and financial markets.

Even if India benefits from a decline in commodity prices caused by the recession, the increase in energy prices induced by geopolitical uncertainties may cancel out these advantages. As the external environment becomes increasingly unfavorable, prudent domestic macroeconomic policy should focus on balancing the exchange rate, controlling inflation, managing real rates, and minimizing macroprudential risks from twin deficits, while this at once.

The first half of the fiscal year sees a mixed macroeconomic performance, and the outlook for the second does not look promising. Inflation refuses to return to the barn and industrial production declines, but India is expected to deliver a two-step game. This is despite global headwinds putting undue pressure on the rupee, current account and trade, even as food and fuel prices and fiscal imbalances continue to weigh heavily on the country’s macroeconomic outlook. Unfortunately, the idea of ​​decoupling India from the rest of the world may not be confirmed, because more than domestic factors, it is external elements such as global recession, rising energy prices , inflation and global interest rates and the strengthening of the dollar which attack the nerves of the economy. The short term will test the extent of the Rupee rout and the RBI’s defense through rates and FX reserves. If measures on the import side are impinging on domestic growth, opting for NRI bonds is not as attractive without raising short-term rates first. Given an incomplete domestic recovery, allowing the rupee to depreciate gradually could keep the exchange rate competitive and help avoid abrupt fiscal consolidation. The RBI must therefore deploy a judicious combination of rupee depreciation and rate hikes, ensuring positive real rates and reducing the interest rate differential with developed markets. Similarly, the potential jolts from slowing exports will also be felt in emerging markets. India is not dependent on exports, but as 45% of exports are driven by labour-intensive MSMEs, this could trigger a domino effect, starting with falling consumer discretionary up to investments in production and, finally, on the financial sector. ALSO READ: IMF chief urges aggressive fight against soaring inflation In other disappointing news, the IMF has confirmed that the global medium-term outlook looks worse than the previous decade. While the past decade has seen advanced economies struggle with low inflation, their problems have worsened considerably this decade, marked by higher-than-acceptable inflation and interest rates. India’s economic recovery is not only incomplete, but also not immune to the repercussions of the global slowdown, which are transmitted through trade, commodity prices, capital flows and financial markets. Even if India benefits from a decline in commodity prices caused by the recession, the increase in energy prices induced by geopolitical uncertainties may cancel out these benefits. As the external environment becomes increasingly unfavorable, prudent domestic macroeconomic policy should focus on balancing the exchange rate, controlling inflation, managing real rates, and minimizing macroprudential risks from twin deficits, while this at once.