Rising inflation : RBI’s accommodative stance may not be tenable for long
Reserve Bank of India has kept the policy rates unchanged since May 2020 as the latest MPC in February 2022 has also voted unanimously to maintain status quo in rates. Clearly, the RBI’s dual objective of growth and inflation continues to lean largely towards growth, even as inflation risks loom large. Since January 2020, the policy repo rate has been lowered by 115 basis points, but the three year simple average marginal cost of funds-based lending rate (MCLR) of scheduled commercial banks dropped by only 60 basis points from January 2020 to January 2022. The pass-through has been insufficient and revival in growth weak. The spectre of inflation needs a more urgent attention, as well. The Russia – Ukraine conflict is likely to exacerbate supply side risks to inflation, as supplies from Russia, the largest natural gas exporter and the second largest oil exporter, are disrupted. International food prices could also spike as supplies of agricultural products from Ukraine are restricted. If the Rupee depreciates sharply, as we are witnessing, external debt servicing cost would go up, moderating the advantage offered by lower interest regime for government borrowings. To cut short the story, RBI’s accommodative stance may not be tenable for long, in the light of the rising inflation and external developments. Fostering credibility in inflation targeting would be essential for price stability and pursuing the growth objective in an orderly and definitive manner.
Covid
Endgame Begins
After living in constant fear, uncertainty and economic loss for two long years, the world has finally decided to move on. Countries have started easing restrictions imposed to curb the spread of Covid 19 and have declared their intention to start treating the virus infection like other seasonal infections such as the flu. In late January, the UK became the first country to lift restrictions even while acknowledging that the pandemic is not over and the virus will continue to mutate and give rise to new variants. The EU followed suit in next few weeks, followed by South Africa, US and Canada. Countries that have relaxed measures pin their hopes on the fact that exposure to the Omicron variant, which is more transmissible but causes milder infection, coupled with the rising rates of vaccination would create an immunity reservoir among the public and result in fewer new cases. All pandemics end eventually, but the virus does not necessarily die out – so far, smallpox is the only infectious disease that the world has completely eradicated. Most others become endemic and either remain dormant or keep circulating at ver low levels. Many diseases, including influenza, measles, HIV/AIDS, cholera, dengue, etc are considered endemic but continue to kill hundreds of thousands of people every year. In all likelihood, Covid 19 is going to stay here, amid us. A close look is called for at some of the serious diseases that have turned endemic in the past, to ensure that the pandemic endgame does not become a protracted and painful journey.
Other Weekly Updates
A Billion Dollar a Day, Global Funds keep selling Indian Stocks
India’s $3.2 billion stock market is witnessing an unprecedented foreign selloff as the surge in oil prices fuels worries of an inflation shock. While Global Funds have been net sellers of local equities since October last, the pace of outflows has intensified since the start of the war in Ukraine. India relies on imports to meet about 85% of its oil needs.
Can Yogi’s Victory in UP make Dalal Street Investors Look beyond Ukraine
Benchmark indices saw a solid 2 per cent jump in the trade on March 10th, the counting day. BJP’s success in four out of five recently concluded state elections, including the all-important UP, kept the sentiments upbeat, further assisted by the falling oil prices. India’s ruling party managed to beat anti-incumbency, high inflation, higher unemployment, Covid and many other challenges, through deft and pragmatic handling of the issues.
PSU General Insurers lose Market Share – New India the only Exception.
Private Sector General Insurer, ICICI Lombard General Insurance Co, with a market share of 8.30% (up from 7.26% a year earlier) climbed to number two position, replacing United India Insurance, whose market share fell to 7.03% from 8.47% the previous year. New India Assurance Co with a market share of 15.05% (14.50% last year) remained at the top position, as per data available from IRDA, between April 2021 and February 2022.
As the dust settles after the Assembly elections to five states, the new Governments will have their tasks cut out. The new AAP Govt in Punjab will have to factor in the state’s huge debt, which is estimated to be half the size of its economy by the end of current FY. The party’s promise of Rs.1,000 to every woman above the age of 18 years will need to be carefully planned. It will also have to work on generating job opportunities, as the unemployment rate in Punjab is much higher than the national average. UP’s debt could be third of its GDP, if the welfare schemes now in vogue are continued and the poll promises of free power for irrigation is implemented. The other three states also have employment rates below the national average. Inflation is another serious concern. But, the time to act is now.
