The Ministry of Finance’s monthly dispatch delivered good news, indicating that inflationary pressures will likely ease in the coming months. But its understrappers have taken away the punch bowl, dropping hints about the ‘moderately’ brisk rate of growth and how their internal estimates were reportedly being lowered to 6.3% this fiscal, down from 7% projected by the central bank. One obvious reason is the bleak outlook of the global economy, that’s likely to be as weak next year as it was during the 2008 financial crisis, thanks to the Ukraine conflict, which is becoming a “forever war”. Besides, the government believes that the US monetary tightening could be a “future risk”, upsetting stock prices, currencies and bond yields, further leading to higher borrowing costs. This spells continued trouble for households and the industry, as it is battling high prices and rising interest rates.
The RBI began its hike cycle only in May, but the interest cover ratio for some 3,000-odd companies has fallen from 5.41 to 4.6 in H1-FY23, according to a Bank of Baroda study. The decline was largely due to falling profits, but higher interest costs, too, added their bit. But a slowing economic recovery would mean corporate profits will likely remain mixed. If, in April, evidence on consumption patterns suggested inflation having a lesser impact on low-income strata than on high-income groups according to the government, the RBI later added that sustained high inflation was having “pronounced adverse effects on the poorer segments” as well.
Against this backdrop, signs of inflation finally cooling down are heartening after staying above the 4% target for 37 consecutive months. But as RBI Deputy Governor Michael Patra observed, the existential question was whether the world is permanently shifting from a low-inflation environment to a high-inflation one. One of the reasons he cited was, given the macroeconomic and geopolitical uncertainties, unanticipated shocks aren’t completely ruled out, which means monetary policymakers must take into account not their known positions but their uncertain future trajectory. In essence, central banks literally “shoot blind”, and RBI’s policy actions next month will determine if India’s policymaker’s got the right shot.
