Almost two months ago, the IMF gave a serious warning – The world may be heading towards an economic recession. Their calculations suggest that the worst situation in half a century is not yet to come.
The IMF had pointed out that the financial systems of America, China and Europe had suffered bigger than expected setbacks and the soaring inflation had distorted all the estimates. Not only post-Covid inflation, but also the Russian war in Ukraine is affecting economic systems. Global economic growth is slowing. Central banks around the world have been raising interest rates to control inflation. Inflation in many parts of the world is higher than the IMF thought earlier this year.
The IMF had predicted that the US central bank, the Federal Reserve, would further raise interest rates, which would increase the strength of the US dollar, which would be a blow to developing countries. When interest rates in the US rise, foreign investment firms withdraw investment from countries including India and shift it to dollars, increasing its demand. Thus, with the strengthening of the dollar, countries like India will have to find more rupees for imports. The IMF also predicted that it could further exacerbate domestic inflation.
Anyway, America has increased the interest rate again the other day. This is the third time in a row that their interest rates have gone up. Federal Reserve interest rates are currently in the 3.0-3.25 percent range. They are not finished with this. It is said that the US interest rate will reach 4.4 percent by the end of this year. Next year it will rise to 4.6 percent.
When the central bank increases interest rates, the cost of repaying loans increases. It affects not only consumer loans but also business loans. Borrowing and spending will decrease. The theory is that controlling the flow of money in the market will reduce inflation. However, this will result in a decline in investment, production and demand. Jobs will decrease and unemployment will increase. That is, if the interest rate continues to increase, it can cause a recession. So, at least some economists are concerned about the US's rapid interest rate hikes. Although higher borrowing rates will be required in the coming years, they suggest slowing the rate of increase.
The US is not the only one raising interest rates like this. Our central bank is also raising interest rates. The European Central Bank does the same. The European Central Bank recently raised interest rates. Before that, they had increased the loan interest in July as well. The Bank of England, Reserve Bank of Australia and Bank of Canada have also raised interest rates in recent weeks.
It is indicated that the Reserve Bank of India may raise interest rates again, following in the footsteps of the previous day's interest rate hike in the US. Foreign investors will need higher interest rates to maintain India's attractiveness. To control inflation, interest rates should be increased like other countries in the world.
The Reserve Bank is pondering what can be done to stop the falling value of the rupee against the dollar. With assembly elections in Gujarat and Himachal Pradesh due later this year, the central government may not feel comfortable with foreign investment firms leaving the country. At the beginning of this year, if you paid less than 75 rupees, you would get a dollar, but now it has reached 80 rupees. When the Reserve Bank's monetary policy committee meets next week, they will have to take into account not only the rise in prices of essential commodities.
August inflation based on retail prices was 7 percent. The fact that it was 6.71 percent in July is not a relief. Inflation remained above the RBI's upper limit for the eighth consecutive month.Taking this into account, experts predict that the central bank may announce a quarter to half percent interest rate hike. Meanwhile, the country's industrial production growth index remains disappointing. In July, the index showed a growth of only 2.4 percent compared to the same period last year. Big growth from the low level during the covid era has not happened
In June, there was a growth of 12.7 percent. It is disappointing that there is no steady improvement in industrial production. Interest rates should be reduced to encourage entrepreneurs. However, it cannot and will have to increase due to inflation and global conditions. A deviation from US and European interest rate hike policy is not possible for us.
The central bank has increased the lending rate three times in a row so far this year. The last of these was a half percent interest rate hike in early August. With this, the repo rate has become 5.4 percent. Interest rates were hiked by 0.4 percent in May and half a percent in June. Meanwhile, there are also reports that some centers in the central government are desirous that there should be a relief to the continuous increase in interest rates by the Reserve Bank.
They point to problems that create high interest rates, such as insufficient employment opportunities, declining private investment, and people's purchasing power not rising as expected. However, many believe that the RBI is likely to take a firm stance that it cannot stay away from the global trend.
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