Inflation rate to ease in FY24, but monsoon is a key risk: CEA

Inflation rate to ease in FY24, but monsoon is a key risk: CEA

• El Nino conditions could have a bearing on monsoon, which in turn, would have an impact on food prices, inflation and economic growth, says V. Anantha Nageswaran
• Chief Economic Advisor V. Anantha Nageswaran said India’s inflation rate was expected to ease in 2023-24, but added that monsoon-related issues would be a key risk. El Nino conditions could have a bearing on the monsoon, which in turn, would have an impact on food prices, inflation, and economic growth, he said.
• He pointed out that there was global uncertainty caused by higher inflation and higher interest rates, creating tight financial conditions. In 2022, developed economies saw a high inflation rate of 8-9%, compared with their average of 2%, while India saw an inflation rate of 7%. He said an economic slowdown in the U.S. might have positive implications.
• A slowing economy would lead to a pause in interest rate increases in the U.S., which would result in the Reserve Bank of India stopping its rate hikes. Factoring in for currency fluctuations, India would likely be a $3.4 trillion economy in 2022-23 and could become a $5 trillion economy by 2025-26 or 2026-27, and reach $7 trillion by 2030, he said. 
• One of the key things to watch out for this year was China’s recovery, which would have an impact on commodity and oil prices.
• To a question on whether India’s economy was sliding back to a ‘Hindu’ rate of growth, he stressed that India’s growth was not stagnating.

Volatility risks of the international rupee

• "It is now widely accepted that while internationalization and a freer capital account comes with its own set of benefits, it is not without risks," M. Rajeshwar Rao said
• India needs to gear up to manage the inevitable volatility that will emerge in the foreign exchange market as the country progresses further towards internationalization of the rupee, a Deputy Governor at the Reserve Bank of India (RBI) said recently.
• An international currency is one that is freely available to non-residents, essentially to settle cross-border transactions, and in the case of the rupee, this will be achieved by promoting the currency for import and export, without any limits.
• But, that will make the rupee more reactive to global events and that would increase outflows, increasing volatility.
• "It is now widely accepted that while internationalization and a freer capital account comes with its own set of benefits, it is not without risks," M. Rajeshwar Rao said.
• "Freer capital flows come with their own set of challenges, the primary one being that of volatility and we need to gear up to manage that."
• Mr. Rao did not expand on how to manage the volatility in his comments, which were part of his keynote address at a conference organized by the Foreign Exchange Dealers' Association of India (FEDAI). The RBI published a copy of the speech on its website.
• India has increasingly aimed to promote trade denominated in rupees. Last July, the RBI introduced a new mechanism to settle international trade in rupees, aiming to promote exports and facilitate imports.
• Mr. Rao said there was a "good amount of interest" in the rupee trading arrangements the RBI was putting in place. And if the central bank's efforts towards rupee-invoicing bear fruit, local exporters and importers will not need to hedge, he added.
• While Mr. Rao cautioned that increasingly interconnected markets will bring greater challenges, there were also opportunities.
• New frontiers will also emerge as Indian banks expand their presence in offshore markets, non-residents participate more in domestic markets, and technological changes continue to transform the way markets function, he said.
• In such an environment, Mr. Rao said, the RBI remains committed to continuously move ahead steadily and in line with the changing macro-financial environment globally and domestically.