Long-standing warnings from policy experts about the effects of increasing rates on increased balance sheets. The markets have been advancing despite the United States’ rising levels of debt and interest rates.
Source: India Posts English
As a result of robust economies, central banks throughout the world have been boosting interest rates to reduce inflation. The interest expenditure outflow has, nevertheless, significantly grown as a result of the bloated balance sheets and higher rates.
Since the US Fed began tightening, the viability of this rising interest expenditure, particularly for the US, has been questioned. According to the US Fed, rates will increase to 5.6% this year before gradually starting to decline.
Whether the market rally is the result of the economy’s inherent strength (as asserted by the central banks) or the market’s attempt to price in the upcoming rate reduction is still up for debate. It is evident, though, that the music won’t endure for very long. Since February 23, the RBI has not hiked interest rates. According to a Reuter’s survey, inflation on July 23 may have gone over the RBI’s 2u20136 cent comfort level.
Despite the fact that a large portion of the increase may be ascribed to the unexpected rise in food prices, the RBI’s delay is likely to result in higher import inflation given the upcoming US rate hike. In reality, the RBI anticipates inflation to exceed its tolerance level of 6% in Q2 FY24, before falling to 5.7% in Q3 FY24. At the conclusion of Q2, liquidity circumstances are tighter. With better liquidity circumstances brought on by the introduction of the Rs 2000 currency note, this year could be a little bit different. The current inflationary conditions may possibly continue into Q3 FY24 if you include in the holiday euphoria that should extend until September.
The output reduction from OPEC and Russia has already raised the price of petroleum, which when combined with a stronger currency might cause inflation to rise much more. The paper from the RBI Monetary Policy Committee (MPC) acknowledges the risks associated with deteriorating macroeconomic conditions and rising crude oil prices. But the decision to stop appears to be the outcome of an exceptionally upbeat outlook supported by healthy private sector financial situations, more government spending, and strong domestic demand.
Source: ET Now
Policy inactivity is expected to enhance the danger of importing inflation in light of a very inevitable rate hike by the US Federal Reserve on September 23. The RBI’s MPC will meet twice this year (in October and December) after the rate decision on August 10. The impact of rate rises (if any) at the upcoming two sessions is unlikely to be felt before the following year due to the transmission lag in monetary policy.
The India narrative needs a cogent policy commitment to maintain momentum and growth, regardless of whether it relates to the government’s measures to limit imports of laptops or exports of rice or the RBI’s response to the shifting macroeconomic climate.
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