Global inflation and growth dynamics worry RBI

According to RBI’s ‘State of the Economy’ May bulletin, "the outlook for the global economy is turning fragile as the descent of inflation is stalling, re-igniting risks to global financial stability. Capital flows have become volatile as nervous investors turn risk averse."

The trajectory of fear of inflation and the consequent high interest rates continue to make an impact on the world GDP growth. Bringing headline inflation to target has been the focus of all central banks, which are currently at various stages of inflation control. The much awaited cut in interest rates by the US Fed Reserve has been getting delayed and the earlier expected cuts to high interest rates at the upper level of 5.25% to 5.50% are not happening. US Fed Reserve Chair Jerome Powell acknowledged the hot first quarter inflation data. He reiterated that the Fed's current stance is appropriately restrictive. This indicates that that rate cuts eagerly awaited by the market globally are not on the cards immediately.

The US 10-year Treasury yield is at 4.422% and in the back of no immediate rate cuts, these rates are attractive for investors to lock in their investible surplus as bonds are having attractive yield without any much risk. US currency is also gaining strength at 104.75 amid growing concerns over higher-for-longer interest rates.

According to RBI’s ‘State of the Economy’ May bulletin, "the outlook for the global economy is turning fragile as the descent of inflation is stalling, re-igniting risks to global financial stability. Capital flows have become volatile as nervous investors turn risk averse."

The continuing current geo political situation, the unsustainable global public debt at $ 235 trillion, equivalent to 238 per cent of the global GDP, particularly the high debt of low and middle income countries, heightened geo political tensions are exerting substantial upward pressures on key commodities prices, with crude oil and gold leading the surge, while base metal prices have seen strong revival in 2024. Supply chain bottlenecks in terms of movement of ships due to tension in Red Sea are all among the factors that need to be monitored vis-à-vis global growth. Moreover the continuing adverse situation on account of climate change is impacting food grains production and supply.

The report states that "While the World Bank commodities prices are projected to decline in 2024 and 2025 on subdued global growth, risks remain titled to the upside, mainly due to conflict disrupting energy supplies and weather events"

In the light of these factors, we have to watch for RBI’s stance when it's Monetary Policy Committee meets on June 7. Even though India has been taking into consideration major domestic factors while taking a stand on repo rates, global factors also weigh heavily on Indian economy and its monetary policy.

The CPI inflation in India stood at 4.83% as at April 2024 as against 5.10%, 5.09%, 4.85% for January, February and March, respectively. Rural CPI inflation remains at elevated level of 5.43% and Urban at 4.11%.The inflation in the food basket grew 8.7% in April up from 8.52% a month before. Similarly India's vegetable inflation stood at 27.80 per cent year on year as against 28.39% in March. The inflation rate for cereals and pulses stood at 8.63% and 16.84 per cent, respectively. Against this background, the next monetary policy may also result in a pause as far as Repo rate is concerned and RBI’s forecast for inflation for this fiscal year will be unchanged at 4.5 per cent on the expectation of normal monsoon. Hence, the possibility of RBI cutting interest rates may be in the second half of the year and that too depending on the evolving situation and incoming data.

The latest RBI bulletin opinions that "The prices of vegetables, cereals, pulses, meat and fish in the food category may keep the headline inflation elevated and closer to 5 per cent in the near term..."

The authors further state that it is only in the second half of the year that a durable alignment with the target may re-commence and sustain till numbers closer to the target are sighted during the course of 2025-26. This indicates that the fight against inflation in the current domestic and global contest is fairly long term and we need to take supply side steps to ease commodities, particularly food items, prices. Climate change and prevailing excessive heat and uncertainties in either excess or deficient rainfall as well as storms will have bigger impact on food items prices, which will be a key factor in the monetary policy decision.

The next date for releasing CPI inflation for May will be on June 12. The data for Wholesale Price in India for the month of April is 1.26% for April 2024 (over last April).

The RBI bulletin says that headline inflation exhibited reticence in traversing the last mile of disinflation and remained above target in most economies. Core and services inflation remained higher than headline inflation across major advanced economies.

Each central banks are independent when it comes to take their decision on rate front, it is expected that these Central Banks may not cut rates ahead of US Fed in spite of high real interest rates which will affect economy and GDP growth.

It is interesting to watch futuristic rate action of AEs and emerging economies.

As far as GDP growth, OECD projection of world GDP growth at 3.1% for 2024 and 3.2% for 2025, US 2.6% for 2024 and 1.8% for 2025, UK 0.4% for 2024 and 1.0% for 2025, Euro area 0.7% for 2024 and 1.5% for 2025, Japan 0.5% for 2024 and 1.1% for 2025.

As far as EMEs for 2024 and for 2025, the projection for Brazil is 1.9% and 2.1%, Russia 2.6% & 1.0%, India 6.6% and 6.6%, China 4.9% & 4.5% , South Africa 1.0% & 1.4%, respectively.

From the data you will observe that except the US, the growth in AEs are at low levels whereas as regard to EMEs, the growth rates looks favourable with stronger performance. India has the highest GDP growth and could be a decelerated level.

(The author is former Chairman & Managing Director of Indian Overseas Bank)