Economic growth is a silver lining



Stock markets fell for three straight days last week. The benchmark BSE Sensex index fell 1,021 points or 1.7% last Friday, the lowest since August 29. Foreign portfolio investors were net sellers on all three days, withdrawing over Rs 5,000 crore. The obvious trigger was the 75 basis point hike in the Bank Rate by the US Federal Reserve last week. With inflation at its highest in three decades in the United States, the Fed should raise the rate above 4.5%. This will lead REITs to withdraw further from Indian markets. Most other Western economies also hiked rates to rein in runaway inflation, further aggravated by the energy and food crisis triggered by Russia’s invasion of Ukraine in February. The RBI also raised the prime rate (PLR) to support the exchange rate against the dollar. A strong dollar caused the value of all major currencies to plummet against it, with the rupee being no exception. Last Friday, the rupee-dollar exchange rate broke through the 81 per dollar mark before ending the day at Rs 81.09 thanks to the intervention of the RBI when it sold billions of dollars to calm the market currencies. Analysts expect further pressure on the rupee in the coming weeks as the Fed tries to contain record inflation in the United States. Already this year, the rupee has depreciated by 8.2% against the dollar.

Granted, most other currencies lost far more against the dollar, but that’s cold comfort, especially when the RBI had to unload billions of dollars from foreign exchange reserves in an attempt to moderate the rupee’s fall. . In the first eight months of this year alone, the RBI unloaded nearly $90 billion in an attempt to defend the rupee. In early September, the RBI said its reserves of $553.1 billion equaled nine months of imports, while reserves in the same month last year equaled 15 months of imports. The pressure from the strengthening US currency is such that all major economies have had to raise their bank rates to defend their currencies. After two decades, the Bank of Japan intervened last week to stop another run on the yen. Even though the Rupee weakened the least against the Dollar, the slide looks unstoppable with more pressure expected in the coming weeks. However, the only silver lining in this grim scenario is that despite adverse external factors, India’s economy is expected to grow by more than 7% this year. With most fundamentals strong and India getting a lucky cushion from cheaper oil imports from Russia despite the sharp rise in global energy prices after the Ukraine war, India’s growth rate is expected to be the highest of any major economy in the world.

The relatively low share of exports in the economy also helps to buffer India against the impending downturn in the global economy. Admittedly, the drawdown of bank credit, also a measure of economic sentiment, has been slow for the business sector, with most of the growth coming from retail and micro and small businesses. After the Covid 19 disruption, new business investment is expected to pick up steam in the coming months. A number of high-value private sector projects are in the pipeline, which should help stimulate economic activity. Domestic inflation is also showing signs of moderation, although analysts expect another rate hike by the RBI’s monetary policy committee at its next meeting. The MPC has already raised the PLR ​​by 140 basis points since April this year. More may be coming soon. Healthy earnings and corporate tax receipts, including monthly GST receipts of over Rs 1.40 lakh crore in successive months since the start of the current financial year, signal a welcome return to growth after uncertainty resulting from the prolonged pandemic. Unless unforeseen events disrupt growth, the Indian economy appears to be doing well in the difficult global conditions.

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