Managing global uncertainty with collective prudence is the need of the hour

The geo political situation can have a negative impact on monetary policy makers and on governments, like India, which import crude oil. This situation per say may not happen

RBI Governor Shaktikanta Das made some thought-provoking observations while addressing the ‘Kautilya Economic Conclave 2023’ held recently in Delhi.

Without actually indicating when softening of interest rates was likely to happen, he said "Interest rates will stay high for now. The monetary policy must remain actively remain disinflationary to ensure that decline in retail inflation recent months continues smoothly".

While reflecting on his remarks, one finds them quite significant as short term gaining control on inflation will not suffice given that inflation has to be controlled on a sustainable and durable basis.

The current globally evolving situation does not give much relief to ‘inflation vs. growth’ dynamics. It should be noted that the Russia-Ukraine war and the situation in the aftermath of Hamas attack on Israel have led to further uncertainty on the geo political front.

The oil price has already risen to $94 per barrel and with the restrictions imposed on production by the oil producing nations will lead to a further price hike. Crude oil prices are running high ,with the tension in Middle East along with the sanction imposed by the US and west on Russia and Iran, which, however has not resulted in any much losses to their oil exports.

Continuation of the tense situation may have a bigger impact on supply of crude. It its recent forecast, Allianz trade says ‘oil could hit $140 per barrel and send the world into recession’. According to Ana Boata, head of economic research at Allianz Trade, "tension in the Middle East and the regional conflict could trigger a price surge for crude oil that could send the commodity to trade at $140 per barrel".

The geo political situation can have a negative impact on monetary policy makers and on governments, like India, which import crude oil. This situation per say may not happen. However, the fact is that these disturbing trends will keep prices of oil and other commodities high while the erratic supply of essential food items will keep the global inflation high. This is the reason IMF in its report mentioned that short term victory in bringing down inflation should not be celebrated as victory. Hence, all central banks will have a ‘wait and watch’ approach before they start cutting rates. As of now, most central banks have put a ‘pause’ on reference rates. We have to look at the RBI Governor’s statement from this perspective. On lowering Repo rates, he says, "there is no such agenda at the moment. The recent simultaneous surge of crude oil prices, bond yields and US dollar has hamstrung the responses of central banks across the globe".

Federal Reserve Chairman Jerome Powel recently reiterated that the signs of cooling down inflation will not be sufficient for Fed to determine the trend and central bank would be resolute as regards its two per cent mandate.

The rise in US bond yields will increase global borrowing costs. Consequently, emerging economies and corporates from such countries find their borrowing costs going high. The US dollar index reaching high of 106.16 will impact global currency markets, particularly emerging markets whose currency will depreciate. There is also the threat of foreign investors taking their money back to safer havens as the Israel - Hamas war is escalating. This calls for proper management of forex reserves and adequate reserves to manage such uncertainty.

One must give credit to India and its regulator RBI for its prudent forex reserves management with current forex reserves of $585.89 billion sufficient to meet 11 months of import. India's rupee dollar remained at 83.1200 latest. Even though rupee depreciation against dollar has been minimum compared to other currencies, over the last year, the rupee saw an 11% slide from $74.21 to $82.61 by the year end. RBI has been mopping up forex reserves during good period to use the same in periods of uncertainty as well as avoid sudden unexpected volatility.

Addressing the Kautilya Economic Conclave 2023, Union Finance Minister Nirmala Sitharaman stated that the Centre was looking at further reducing its debt burden. She added that India has been following the policy of prudent spending by resisting the temptation of fiscal profligacy, especially after the pandemic, to avoid burdening future generations. The excessive debt level is a global problem both for the developed and developing countries, which was widely addressed during the G20 Summit. US Fed Reserve's Jerome Powel has maintained that the country’s debt isn't a problem in itself, although the rapidly rising debt levels could become a problem moving forward. Rating Agencies are already voicing their concerns on heavy debt of most of the countries in their rating rationale.

India from a fiscal deficit level of 3.4% in 2018-19 to 4.6%of GDP in 2019-20 went substantially high to 9.2% in 2020-21, essentially because of Covid-19, brought down next year to 6.7% in 2021-22, further down to 6.4% in 2022-23 with the aim to contain at 5.9% in 2023-24. There is also short term plan to achieve the level of 4.5% in 2025-26.

In view of numerous uncertainty prevailing globally with further climate risk calling for large investments required for achieving net zero emissions and to keep global warming at minimum level. Many countries have to be cautious about their borrowing levels and aim for gradual reduction to achieve a better fiscal path.

Globally we are faced with vicious cycle of inflation, high interest rates, supply chains getting affected, fragmentation, climate risks, political uncertainty and war apart from emergencies in the form of natural calamities, which all call for preparedness and sufficient fiscal space.

According to Nirmala Sitharaman, enterprises need to weigh terror risks while investing as global terrorism was adding further risks to the economy while food security, fertiliser and fuel supplies were getting affected by two simultaneous wars.

Her observations, along with those of the RBI Governor and the Fed Reserve chief, call for more preparedness on the part of the regulator and respective governments to prudently manage the economic, fiscal and monetary policy in order to reduce the impending loss and aim to have smooth sailing. On that count, India is better placed but at the same time we need to substantially improve further.

(The author is former Chairman & Managing Director of Indian Overseas Bank)