Monetary policy: Global and local

Source: This post has been created based on the article “Monetary policy: Global and local”, published in Business Standard on 12^th June 2023.

Syllabus Topic: GS Paper 3 – growth and development of Indian Economy

Context: The article discusses the recent developments in the monetary policies of the US Federal Reserve (the Fed) and the Reserve Bank of India (RBI) in the context of global events.

US Fed’s tightening and Russia’s invasion of Ukraine has a big impact on the world economy. In 2021, the Fed had to deal with a big inflation problem. It increased interest rates 10 times from March last year to between 5 and 5.25%. At the same time, Russia invaded Ukraine. These two events had a big impact on the world economy, affecting everything from start-ups and cryptocurrencies in India to the global energy market.

What are its impacts on India?

In India, actions by the Fed and the Reserve Bank of India (RBI) have slowed down the economic growth that followed Covid-19.

Inflation in India has dropped a lot over the year and is now close to the target of 4%.

What are the future projections for India’s growth?

The RBI has been successful in managing inflation by predicting future inflation and acting accordingly.

If global food prices don’t rise too much because of the problems with Ukrainian food exports, the RBI might be able to act quickly to keep inflation below 4%.

If the Fed increases interest rates and the RBI doesn’t, the Indian rupee might lose value. This could help the Indian economy by making imported goods more expensive and Indian exports cheaper.