A double whammy has hit the world: on the one hand, there is a recession trend with declining demand while prices are rising. Central banks around the wglobetook inflation too lightly, Swaminathan Aiyar says. There are signs of stagflation. While we may not collapse like Sri Lanka or Pakistan, we are definitely in trouble, he says.


How real is the fear of rising interest rates making global markets nervous?

We are at the highest inflation in years. The wholesale price index for April had just come in at 15.05%. The consumer price index is 7.8%. These are extraordinarily high rates, and there is nothing special about India. In America, where target inflation is 2%, their latest inflation rate is 8.5%, which has fallen slightly to 8.3%. So there is global inflation.

Swaminathan Aiyar

The world is currently caught in a massive inflationary trap. The prices of goods, services, and production – have soared in the past 12 months. Inflation started in 2021, and the war in Ukraine has accelerated it. The physical shortage of a large number of goods has built up over time, and on top of that came the shock of the war and the sanctions imposed on Russia, which is a major supplier of several items. The war has blocked the Black Sea, one of the main supply routes from Russia and Ukraine.

On top of everything else, China has committed to hara-kiri by having a full lockdown to wipe out COVID. So there’s a separate supply shock because China has no production. These different strands have all come together for one giant surprise.

We are in a situation where on the one hand, there is a recession trend; a recession is because demand is falling while, at the same time, prices are rising. Some people call this stagflation.

In the case of India, we have been hit on both sides. We expected this to be a very good growth year. The World Bank and the IMF had said India would be the fastest-growing major country, and maybe it still will be, but before, they were hoping for 9% growth or something like that; now people say maybe 7%, 7.5%, maybe 6%. So we are in a difficult position right now with inflation rising fast because inflation is rising everywhere else in the world, and therefore, we can’t escape it. The downward trend, the recession trend, is also coming across the globe, and we can’t run That. We may be better positioned to face the problem than some other countries. We will not collapse like Sri Lanka or Pakistan, but we are in trouble.

Do you think the situation is under control? Can Central Banks Control Inflation Just By Raising Rates? Raising interest rates does not solve the supply problem. Raising interest rates is a way to — if there’s an overheated economy with too much demand, you could say I want to slow that demand down by raising interest rates and making it hard for people to buy, but that’s not the case today. India does not have an overheated economy where there is too much demand; in fact, there is not enough. Look at India Inc’s earnings – the auto sector is not doing well, and demand is low, so production is affected.

There is a shortage in areas such as metals, but prices have also fallen sharply there. So, the inflation problem cannot be solved simply by lowering interest rates. In some cases, it can be tightened; in the case of wheat, the government is trying to do this by imposing an export ban. If you look at the world price of grain, it costs about Rs 40 per kilo. If we freely allow the export of grain and all our excess buffer stocks, we can have a huge export boom. Still, if the Indian price is equal to the world price at Rs 40 per kilo, there will be chaos; there will be riots in the streets, so the government has tried to do supply management by saying that we will stop all wheat exports.

I think this was a bad move; I mean, it should have been more gradual, and they should allow some exports, but right now, they can do that. They have banned improving wheat supplies, which could help reduce inflation in that area. Furthermore, you will have to live with the global trends; you cannot wish the global trends away; just as Indonesia has imposed this restriction on edible oil, we are a very large importer of edible oil, and we will suffer.

The government can, to some extent, reduce import or excise duties on goods such as edible oil, crude oil, gasoline, and diesel – but all this would be a limited amount of relief. It’s not that the prices will fall, but you can limit the amount the prices rise; you’ll have to wait for this war to play out and this business cycle to complete; those items are out of your reach. Check. What is the best course of action for the RBI right now? Central banks worldwide, including the RBI, were too relaxed about inflation. They kept thinking that this was a reprieve and that it would go away. Then they thought there had been an increase last year; it would go away, then they thought no, when the war came, people thought maybe this would be just temporary, there will be a quick fix to the war.

There is no quick fix to the war, and it has now become clear that inflation has spiraled out of control compared to what you expected.

In America, the target is 2%, which went to 3-4%; they said you know it could go down again. Instead, it’s dropped to 5%, 6%, 7%, 8%, and 8.5 %, so there’s panic there, and they’re getting tighter and tighter. The RBI can’t afford to be locked out, and that’s why the RBI has been reluctant to raise interest rates, but if everyone does it, they say we will have to because if we don’t, there could be an attack on the rupee take place.

You can’t have a situation where everyone raises rates and India doesn’t; if you do, that huge amount of money can flow out of India, so reluctantly increasing its paces will continue to grow. There is an option. Aside from protecting our foreign exchange reserves, it will also help tame inflation to some degree.


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