External risk factors for the Indian economy: Global storm: Overseas risk is main policy challenge

Source: The post is based on the article “Global storm: Overseas risk is main policy challenge” published in The Times of India on 24^th September 2022.

Syllabus: GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: Indian Economy and its external challenges.

News: In line with major global markets, Indian financial markets were struck recently. Similarly, the rupee-dollar exchange rate has also hit a record low at Rs 80.99.

What are the major external risk factors for the Indian economy?

1) Unclear trajectory of major central banks trying to pull back inflation. Hardening of interest rates will trigger a sharp economic slowdown in major economies, 2) Most currencies weakened against the dollar and Japan’s central bank made its first foreign exchange market intervention in over two decades, 3) Inflation is unlikely to quickly go downwards even as demand falls. This is because of ongoing energy supply readjustments that have pushed economic activity and inflation in different directions.

How European countries are facing economic challenges?

Europe: Ever since the Ukraine crisis, European gas and electricity prices have risen 105% and 75%, respectively. Further, Europe’s economic activity is rapidly slowing as the energy shock undermines manufacturing.

UK: The UK’s inflation, at 9.9%, is almost five times its inflation target.

What are the economic challenges for India?

Economic policymaking in India will have to factor in an abnormal global scenario. At present, there is no clear signal about the near future behaviour of either revival or price stability of the Indian Economy.

RBI’s monetary policy committee will have an upcoming bi-monthly meeting that has to contend with risks coming largely from overseas.