World, we have a problem!.
U.S. economic recovery is exporting Inflation far and wide, driving the U.S. dollar and central banks are panicking.
From Russia, Brazil, to Turkey, the Central Banks are pressing pause on the interest rates. The double whammy is more on the emerging markets that are yet to get out of Covid woods. The breath-taking recovery in the U.S. was Fed-induced near zero-rate till now, and this growth is now feeding inflationary pressures to the rest of the World.
The dovish stance of the Fed on benign Inflation gave way earlier this week with a clear signal that it will start raising the rates by 2023. The expectation is that Inflation will be under check till then. However, some economists doubt this. What-if the stickiness continues more so if the inflation expectations get prolonged, then the pressure on demand for higher wages will be elevated.
Worse scenario for emerging-economies
For Emerging economies, Inflation is the last headache they want at the moment. The fragile recovery is underway, and some economies like India are still in the midst of the second wave. Most of the emerging economies had gone long on dollar debt, and with the dollar strengthening, the borrowing costs may go up.
The emerging economies do not have the luxury of waiting as small bouts of Inflation have a cascading effect on household savings, corporate's ability for debt-servicing, and societal implications. These Central Banks have focused on bringing back the growth on track as policies are not in tandem to boost demand.
Fed's dilemma is that it wants to avoid the 2013 'taper tantrum" where the central banks across the World were forced to react after the sudden withdrawal of foreign investment when the U.S. central bank announced wind-down of stimulus.
India scenario
India has witnessed a spurt in Inflation; the latest data as measured by Consumer Price Index (CPI) was 6.3 percent in May, above the Reserve Bank's target band of 2-6 percent. Although. Worrisome is that the core inflation is rising, mainly fuelled by rising oil & diesel prices. This can add to the stickiness of inflation pressures and derail the central bank's growth focus.
If we analyze, many states were in lockdown to the semi-lockdown situation, creating supply-side bottlenecks. The accurate picture will emerge only in the July-September quarter, provided the much-feared Covid' Third wave' danger recedes as the vaccine-induced recovery gathers pace.
One guess is this time; the pent-up demand may not be elevated as consumers will hold back big-ticket spending and will be broad-based only when the Covid overhang has passed.
state after states in India is now
It appears the Central Bank in India will be in wait and watch mode and not go the Brazil way of raising the rates. Now, the ball is square with the Indian government, how it plays the stimulus card, divestment pace, and grab this opportunity to push through the reforms holding back the macroeconomy. Instead of getting busy fighting Twitter, if there is a time to attract real foreign investment, it is now. Even on the downside, India will be the fastest-growing economy in terms of GDP; all it needs is the government's focus and to prevent the economy from falling into a stagflation trap.
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