“It was the best of times, it was the worst of times…” are the famous opening words of the Charles Dickens classic, A tale of two cities, and it seems that this perfectly describes the current Indian economic situation. Why? Because on the one hand April’s scorching inflation reading of 7.79% means faster monetary tightening which will impact growth, but on the other the recovery after the economy reopens post-pandemic is clearly reflected in rising exports, higher GST collection and improved employment sentiment.
Citi’s chief economist for India, Samiran Chakraborty, fears that the momentum given by the reopening of trade after the third pandemic wave of December 2021 is beginning to peak.
“Current high-frequency data suggests the economy is doing reasonably well and overall…. It’s hard to say whether (the recovery) has peaked or not, but for now, there’s no no signs of moderating in the recovery seen from the Omicron lows,” he told CNBC-TV18.
inflation and war
A key question posed is how much of the rise in inflation is due to the ongoing war between Russia and Ukraine?
Soumya Kanti Ghosh, chief economic adviser at India’s biggest bank, the State Bank of India, said a closer comparison of February’s inflation to April’s shows the peak at 60% because of the war.
“It’s because of food and fuel. When the two walk in tandem, the inflation figure threatens to spin out of control… In my view, we are unlikely to see a respite anytime soon. he said.
inflation and the market
For global markets, much will also depend on how the US central bank reacts to rising inflation.
Morgan Stanley’s Jitania Kandhari thinks the Federal Reserve has recently been talking about a soft landing.
“Don’t think the United States will go into a recession this year. There could be a possibility of a recession in the second half of next year… The main thing to watch is wage inflation which will determine the hawkishness of Fed policy,” she said.
Inflation vs. difficult growth
India’s inflation has been above the RBI’s 2-6% target range for four consecutive months and economists expect it to fall outside the range this year.
Citi’s Chakraborty believes that if sticky inflation is to be controlled, some growth sacrifices are justified.
“My feeling is that the RBI may be fine with raising rates up to 5.50% (currently at 4.40%), but then the pace and quantum of rate hikes will start to affect growth and the financial capacity,” he said.
How is the RBI likely to react?
“We expect the RBI to increase aggressively by 50 basis points in the next meeting and meeting after 100 basis points in the next two meetings. And ultimately we believe the nominal rate will have to be by 6.5% by next year,” Ahya said.
(Edited by : Abhishek Jha)